Gist Of Economics: Yuvraj Ias

YUVRAJ IAS GIST OF ECONOMICS A Quick Way To Cover And Revise The Syllabus

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Copyright © 2019 Yuvraj IAS All Rights Reserved. This Book Or Any Portion Thereof May Not Be Reproduced Or Used In Any Manner Whatsoever Without The Express Written Permission Of The Publisher Except For The Use Of Brief Quotations In A Book Review. Published By: Global Pro Publications Chandigarh, Punjab, India Email: [email protected] Sold By: Global Pro Sellers Chandigarh, Punjab www.yuvrajias.com

Contents Basic Concepts of Economics ................................................................................................... 2 Indian Economy Overview ........................................................................................................4 Inflation .......................................................................................................................................... 7 Monetary Policy of India .......................................................................................................... 10 REPO and CRR Rate Cuts ........................................................................................................ 15 Rupee Devaluation or Depreciation ..................................................................................... 16 Unified Payment Interface (UPI) ............................................................................................ 20 Currency in Circulation vs Reserve Money vs Money Supply ....................................... 22 Government Budgeting .......................................................................................................... 26 Budget Documents .................................................................................................................. 29 Difference between Full Budget and Vote on Account .................................................. 36 Five Year Plans before the Liberalisation ............................................................................ 38 Five Year Plans after the Liberalization ................................................................................ 41 How to Measure Human Development Index? ................................................................ 43 Sustainable Development: Background, Definition, Pillars and Objectives ............... 45 Types of Index ........................................................................................................................... 46 Definition: Poverty & Poverty Line in India ........................................................................ 48 Goods and Services Tax (GST) .............................................................................................. 49 What is GST Bill and how will it affect the life of a Common Man? ............................. 52 Anti Poverty & Employment Generation Programmes in India .................................... 57 Public Sectors in Indian Economy: Objectives, Importance, Performance and Problems ..................................................................................................................................... 59 NABARD: Functions, Roles & Achievements ..................................................................... 62 Industrial Policy ......................................................................................................................... 65 FINANCIAL MARKETS .............................................................................................................. 67 DISINVESTMENT ........................................................................................................................ 71 Demand & Supply .....................................................................................................................77 Financial Inclusion ..................................................................................................................... 83 DIRECT TAX CODE ................................................................................................................... 85

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Basic Concepts of Economics National Income Under the broad topic of national income you may hear terms like GDP, GNP, NNP etc. GDP: Gross Domestic Product (GDP) is the total money value of final goods and services produced in the economic territories of a country in a given year. Total value of goods and services produced in India for 2014-15 is projected to be around 100 lakh crore Indian rupees or around 2 trillion US dollars at current market prices. This is the value of Indian GDP when expressed at current market price. GDP stands for total value of goods and services produced inside the territory of India irrespective of whom produced it – whether by Indians or foreigners. GNP: Gross National Product (GNP) is the total value of goods and services produced by the people of a country in a given year. It is not territory specific. If we consider the GNP of India, it can be seen that GNP is lesser than GDP. Monetary Policy Monetary Policy refers to the policy of the central bank. In India Reserve Bank of India (RBI) is responsible for monetary policy. Repo, Reverse Repo, CRR, SLR etc are part of monetary policy. REPO rate: REPO means Re Purchase Option – the rate by which RBI gives loans to other banks. Bank re-purchase the securities deposited with RBI at the REPO rate. Present rate is 8%. Reverse REPO rate: RBI at times borrows from banks at a rate lower than REPO rate, and that rate is known as Reverse REPO rate (now 7%). REPO and Reverse Repo are two major options under LAF (Liquidity Adjustment Facility). Marginal Standing Facility (MSF): MSF is the rate at which scheduled commercial banks could borrow money overnight from RBI against approved securities. Borrowing limit of banks under marginal standing facility is 2 percent of their respective Net Demand and Time Liabilities (NDTL).

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Bank Rate: Bank rate is a higher rate, (1% higher than REPO rate) charged by RBI when it gives loans to commercial banks. Present bank rate is 9 %. Bank rate is different from MSF in the nature that Bank rate is long term, applies for all commercial banks and there is no limitation like 2 percent of their respective Net Demand and Time Liabilities (NDTL). CRR: CRR corresponds to Cash Reserve Ratio. It corresponds to the percentage of liquid reserves each banks have to keep as cash reserve with RBI (in their current accounts) corresponding to the deposits they have. Banks will not get any interest for these deposits. Present CRR is 4%. SLR: SLR (Statutory Liquidity Ratio) corresponds to the percentage of liquid reserves each banks have to keep as cash reserve with themselves corresponding to the deposits they have. Banks have to mandatory keep reserves corresponding to SLR locked with themselves in the form of gold or government securities. Present SLR is 22 %. The main difference between CRR and SLR is that banks need to keep CRR with RBI, but SLR with themselves, but locked. CRAR: Capital to Risk Weighted Assets Ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets. The higher the CRAR of a bank the better capitalized it is. Fiscal Policy Fiscal policy refers to the policy actions of the Government. Budget, tax, subsidies, expenditure etc. forms part of the fiscal policy. You might need to understand various deficits like Fiscal Deficit and Primary Deficit as part of Fiscal Policy. Fiscal Deficit (FD): The fiscal deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowing). In layman’s term FD corresponds to borrowings and other liabilities. Balance of Payments Current Account Deficit (CAD): Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). Current account deficit in simple terms is dollars flowing in minus dollars flowing out. Capital Account Deficit: Capital account Deficit occurs when payments made by a country for purchasing foreign assets exceed payments received by that country for selling domestic assets. (For example, if Indians are buying a lot of properties in

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US, but if Americans are not buying any properties or buildings in India, India will have Capital Account Deficit.) A deficit in the capital account means money is flowing out the country, but it also suggests the nation is increasing its claims on foreign assets. In other words at times of Capital Account Deficit, foreign investment in domestic assets is less and investment by the domestic economy in foreign assets is more Indian Economy Overview A clear understanding of Indian Economy can help you in more than one way. As almost every problem has an economic angle, knowledge on the performance of various sectors of Indian Economy gives you always an opportunity to see things in a wider perspective. Having posted many articles on the economics, covering topics like basic concepts, inflation, fiscal policy, monitory policy etc., we now focus on Indian Economy overview. PS: Our next set of articles in this category will cover sub-sectors like Banking, IT, Biotechnology, Agriculture etc in detail. Sectors of Indian Economy      

Three sectors – Primary, Secondary and Tertiary. Primary = Agriculture related. Secondary = Industry related. Tertiary = Service related. Sector share towards GDP : Tertiary (60%)> Secondary (28%)> Primary(12%). Sector share by working force : Primary (51%)> Tertiary (27%) > Secondary (22%)>

India as an investment destination India is the most attractive investment destination in the world, according to a survey by global consultancy firm Ernst & Young (EY). Organisation for Economic Co-operation and Development (OECD) projections on growth rate of India are 3.4 per cent for 2013-14, 5.1 percent in FY 2014–15 and 5.7 per cent in FY 2015–16. The HSBC Trade Confidence Index, the largest trade confidence survey in the world, has positioned India at the top with 142 points. The increasing demand due to its population makes the country a good market. Sectors projected to do well in the coming years include automotive, technology, life sciences and consumer products. Indian Exports: India’s exports have also been doing well, touching US$ 303 billion in FY 2012–13, almost double of what it managed (US$ 167 billion) four years ago. The US$ 1.2 trillion investment planned for the infrastructure sector in the 12th

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Five-Year Plan will go a long way in improving export performance of Indian companies and the Indian growth story. Indian GDP: India is the third biggest economy in the world in terms of GDP measured at purchasing power parity (PPP), according to a World Bank report. India is also projected to become the third largest economy (Nominal GDP) in the world by 2043. Indian Economic Scenario and Growth Potential India’s industrial economy is gathering momentum on the back of improved output of eight core sector industries – coal, crude oil, refining, steel, cement, natural gas, fertilisers and electricity. Some of the important economic developments in the country are as follows:      

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Indian companies have been signing many private equity (PE) deals, registering substantial increase from previous years. Indian corporates have also been raising significant amount through commercial papers (CPs). The cumulative amount of FDI equity inflows into India were worth around US$ 300 billion in the 2000–2014 period. The estimated value of FII holdings in India stands at US$ 279 billion. IT spending by the Government of India is growing 7 per cent year-on-year, according to a report by research and advisory firm Gartner. India’s IT-business process outsourcing (BPO) industry revenue is expected to cross US$ 225 billion by 2020, according to a Confederation of Indian Industry (CII) report, titled ‘The SMAC Code-Embracing New Technologies for Future Business’. General Electric (GE) plans to make India a manufacturing hub for its global markets due to its huge talent pool and lower manufacturing costs. The company’s upcoming plant at Chakan, Maharashtra, is the first major step towards this direction. Public cloud services market in India is expected to grow by 37.5 per cent to touch US$ 434 million. Garments exports from India have increased by 31 per cent to touch US$ 1.19 billion year-on-year (y-o-y) in 2013, on back of increased demand from all major markets, including the US and the European Union (EU). The interest for costume jewellery is on the rise and costume jewellers estimate that they have clocked 20–30 per cent growth in the current fiscal. The industry size is expected to touch Rs 150 billion (US$ 2.40 billion) by December 2015, as per an industry body. The number of millionaires in India is expected to reach 300,000 by 2018 from about 182,000 currently, according to the global wealth report released 5

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by the Credit Suisse Research Institute. Wealth per adult in India has risen by 135 per cent from US$ 2,000 in 2000 to US$ 4,700 in 2013, at an average annual rate of 8 per cent. India added about US$ 17.6 billion worth of value domestically in 2012 by processing and fabricating gold bars and coins. The Life Insurance Council (LIC), the industry body of life insurers in India, has estimated the sector to record a compound annual growth rate (CAGR) of 12–15 per cent over the next five years. The total number of registered micro, small and medium enterprises (MSME) in India recorded a 19 per cent growth in FY 2011–12, according to the Ministry of MSME’s annual report for FY 2012–13. Agricultural gross domestic product (GDP) in India is expected to grow by over 5 per cent.

Government Initiatives to Boost Indian Economy 1. Frame work for Investments by RBI: In a bid to bring more investments into India’s debt and equity markets, the Reserve Bank of India (RBI) has set up a framework for investments which will enable foreign portfolio investors to take part in open offers, buyback of securities and disinvestment of shares by the Central and State governments. 2. Opening up Insurance sector: FIIs and non-resident Indians (NRIs) will now be able to invest in the insurance sector, within the 26 per cent cap on FDI. DIPP confirmed in a press note that the norms would also apply to insurance brokers, third-party administrators (TPAs), loss assessors and surveyors. The investments can be made through the automatic route. 3. Promotion of SMEs: The Government of India along with the industry has been working towards fashioning a more dynamic environment for small and medium enterprises (SMEs) and startups over the last few years. Indian SMEs employ about 40 per cent of the country’s workforce and contribute 45 per cent to the overall manufacturing output. A positive policy framework allied with the growth of angel funds and a vibrant entrepreneurial culture is contributing to the growth of first generation entrepreneurs in the country. 4. Infrastructure: The Cabinet Committee on Investments (CCI) under UPA government had approved the speedy execution of 36 infrastructure projects entailing investments of Rs 1,830 billion (US$ 29.28 billion) to boost investor confidence. Road Ahead With the objective of taking bilateral trade relations to the next level of a comprehensive economic partnership agreement, India is readying itself to sign the free trade agreement (FTA) on services and investment with the Association of 6

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Southeast Asian Nations (ASEAN). The target for the two-way trade partnership is US $100 billion by 2015, for which an integrated transport network is necessary. Thus, the emphasis is on a massive road connectivity plan to tie the region together to enhance economic objectives. References: Ministry of Finance, Press Information Bureau (PIB), Media Reports, Indian Brand Equity Foundation (IBEF), Department of Industrial Policy and Promotion (DIPP), Securities and Exchange Board of India (SEBI) etc. Inflation Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money. Thus, inflation is a condition of price rise. The reason for price rise can be classified under two main heads : (1) Increase in demand (2) Reduced supply. Inflation explained with an example Suppose for Rs.100, last week you bought 5 Kg. of rice. This means that the cost of 1Kg of rice was Rs. 20. This week when you approached the same shop-keeper and paid Rs.100 to get rice, he gave only 4 Kg of rice. He also explained that the price of rice has increased, and now it is Rs.25 per Kg. This example clearly explains the fall in the purchasing power of money. For Rs. 100 you could get 5 Kg rice before, but now only 4 Kg. So purchasing power of money got reduced. This is inflation. And let’s us calculate the inflation rate (percentage). If price of rice, which was Rs.20 per Kg increased to Rs.25, this corresponds to Rs.5 increase on Rs.20, ie. 25% increase. So the inflation rate is 25%, which is obviously a very high rate. Problems with Inflation Having understood what inflation really is, let’s ponder what effects can inflation cause in an economy? Is inflation that bad? High rates of inflation is bad because, it can eat up hard-earned money of ordinary people. Life of common man will become tough. His savings will soon be exhausted, unless his investments offer high rate of return than the inflation rate present in the country. Inflation Rates in India There are different indices in India like Wholesale Price Index(WPI), Consumer Price Index(CPI) etc which measure inflation rates in India. But what we generally find in headlines as inflation rate in India is Inflation rate based on WPI. In the last 50 years, WPI based inflation rate shows an average inflation rate around 7-8%. The 7

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highest inflation rate observed in India was 34.68 Percent in September of 1974. The lowest rate touched was -11.31 Percent in May of 1976 ( a case of deflation). How to measure Inflation rate? Unchecked inflation can ruin the whole economy. There are many examples from African and South American economies which got shattered by the high inflation rates. But who measures inflation rate in India? And what are they types of Inflation indices in India? Let’s study each of them. Inflation can be measured at three levels – producer, wholesaler and retailer (consumer). Prices generally rise in each level till the commodity finally reach the hand of consumer. Inflation at Producer Level As of now in India, there is no index to measure inflation at producer level. A Producer Price Index (PPI) is proposed, but so far this type of inflation calculation has not started in India. Inflation at Wholesale Level This is the most popular inflation rate calculation methodology in India. The index used to calculated wholesale inflation is known as Wholesale Price Index (WPI). This inflation rate is often known as headline inflation. WPI is released by the Ministry of Commerce and Industry. Though RBI used WPI for most of its policy decisions before 2014. But WPI based inflation calculation was not false proof. WPI shows the combined price of a commodity basket comprising 676 items. But WPI does not include services, and it neither reflect the bottlenecks between producer and wholesaler nor between wholesaler and retailer (consumer). Hence from 2014, as part of the reforms initiated by RBI governor Raghu Ram Rajan, RBI shifted to CPI for policy decisions. Inflation at Retail Level (Consumer Level) Consumer often directly buys from retailer. So the inflation experienced at retail shops is the actual reflection of the price rise in the country. It also shows the cost of living better.

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In India, the index which shows the inflation rate at retail level is known as Consumer Price Index (CPI). CPI is based on 260 commodities, but includes certain services too. There were four Consumer Price Indices covering different socioeconomic groups in the economy. These four indices were Consumer Price Index for Industrial Workers (CPI-IW); Consumer Price Index for Agricultural Labourers (CPI-AL); Consumer Price Index for Rural Labourers (CPI -RL) and Consumer Price Index for Urban Non-Manual Employees (CPI-UNME). CPI is now using a new series on the base 2010=100 for all-India and States/UTs separately for rural, urban and combined. The Central Statistics Office (CSO), Ministry of Statistics and Program Implementation releases Consumer Price Indices (CPI). CPI is based on retail prices and this index is used to calculate the Dearness Allowance (DA) for government employees. Headline Inflation vs Core Inflation Having studied inflation rate measurement at different levels, now let’s focus on two terms related to inflation. They are Headline Inflation and Core Inflation. Headline Inflation Headline Inflation is the measure of total inflation within an economy. It includes price rise in food, fuel and all other commodities. The inflation rate expressed in Wholesale Price Index (WPI) usually denotes the headline inflation. Though Consumer Price Index (CPI) values are often higher, WPI values traditionally make headlines. Core Inflation (Underline Inflation or Non-food Inflation) Core inflation is also a term used to denote the extend of inflation in an economy. But Core inflation does not consider the inflation in food and fuel. This is a concept derived from headline inflation. There is no index for direct measurement of core inflation and now it is measured by excluding food and fuel items from Wholesale Price Index (WPI) or Consumer Price Index (CPI). Causes of Inflation There can be two set of factors that can cause inflation in an economy. They are Demand Pull and Cost Push. Demand Pull Factors 1. Rise in population.

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2. Black money. 3. Rise in income. 4. Excessive government expenditure. Cost Push Factors 1. 2. 3. 4. 5.

Infrastructure bottlenecks which lead rise in production and distribution costs. Rise in Minimum Support Price (MSP). Rise in international prices. Hoarding and black marketing. Rise in indirect taxes.

What measures can be taken to address inflation? Both government and central bank (Reserve Bank) try to tackle inflation with their policies which are known as Fiscal and Monetary Policies respectively. Fiscal policies correspond to tax related measures taken by government to control inflation (money supply). RBI through its various monetary policies limit the money supply by altering rates like CRR, Repo, Reverse Repo etc. Administrative measures taken by government like strengthening of Public Distribution System also plays a crucial role in curbing inflation. Is inflation always bad for the economy? Though a high rate of inflation is not good for the economy, a mild inflation, say under 3%, may turn, at times, useful for the economy. As we hinted in the beginning, inflation can occur because of high demand too. High demand on scarce resources will automatically increase prices. This is called demand pull inflation. But demand for a commodity is a good sign from the industry perspective. Industries now will try to produce more commodities to reap the benefit of high prices and demand. More production will trigger GDP growth. Monetary Policy of India You might have heard of the term Monetary Policy in Economy class. Recently there were many changes in the way Monetary Policy of India is formed – with the introduction of Monetary Policy Framework (MPF), Monetary Policy Committee (MPC), and Monetary Policy Process (MPP). Why should a country need a monetary policy? Who makes it? What is the purpose of monetary policy? What are the instruments used for it? Let’s see. In this article series, we cover the Monetary Policy of India in detail.

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What is meant by Monetary Policy? Monetary policy refers to the policy of the central bank – ie Reserve Bank of India – in matters of interest rates, money supply and availability of credit. It is through the monetary policy, RBI controls inflation in the country. RBI uses various monetary instruments like REPO rate, Reverse RERO rate, SLR, CRR etc to achieve its purpose. (This is explained well in one of our earlier articles – basics of economy concepts). In short, Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy. How does the Reserve Bank of India get its mandate to conduct monetary policy? The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934. What is the main goal of Monetary Policy of India? Maintain price stability. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition for sustainable growth. To maintain price stability, inflation needs to be controlled. The government of India sets an inflation target for every five years. RBI has an important role in the consultation process regarding inflation targeting. The current inflation targeting framework in India is flexible in nature. Flexible Inflation Targeting Framework (FITF) 

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Flexible Inflation Targeting Framework: Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve Bank of India (RBI) Act, 1934). Who sets the inflation target in India: The amended RBI Act provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every five years. 11

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Current Inflation Target: The Central Government has notified 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 percent and the lower tolerance limit of 2 percent. Factors that constitute a failure to achieve the inflation target: (1) the average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters, OR (2) the average inflation is less than the lower tolerance level for any three consecutive quarters.

The Monetary Policy Framework (MPF) While the Government of India sets the Flexible Inflation Targeting Framework in India, it is the Reserve Bank of India (RBI) which operates the Monetary Policy Framework of the country.  

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The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to operate the monetary policy framework of the country. The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation, and modulation of liquidity conditions to anchor money market rates at or around the repo rate. Note: Repo rate changes transmit through the money market to the entire financial system, which, in turn, influences aggregate demand – a key determinant of inflation and growth. Once the repo rate is announced, the operating framework designed by the Reserve Bank envisages liquidity management on a day-to-day basis through appropriate actions, which aim at anchoring the operating target – the weighted average call rate (WACR) – around the repo rate.

Monetary Policy Committee (MPC) Now in India, the policy interest rate required to achieve the inflation target is decided by the Monetary Policy Committee (MPC). MPC is a six-member committee constituted by the Central Government (Section 45ZB of the amended RBI Act, 1934). The MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote. The resolution adopted by the MPC is published after the conclusion of every meeting of the MPC. Once in every six months, the Reserve Bank is required to publish a document called the Monetary Policy Report to explain: (1) the sources of inflation and(2) the forecast of inflation for 6-18 months ahead. 12

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The present Monetary Policy Committee (MPC) The Central Government in September 2016 constituted the present MPC as under: 1. Governor of the Reserve Bank of India – Chairperson, ex officio; 2. Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy – Member, ex officio; 3. One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio; 4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member; 5. Professor Pami Dua, Director, Delhi School of Economics – Member; and 6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad – Member.(Members referred to at 4 to 6 above, will hold office for a period of four years or until further orders, whichever is earlier. The Monetary Policy Process (MPP) The Monetary Policy Committee (MPC) determines the policy interest rate required to achieve the inflation target. The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. Views of key stakeholders in the economy and analytical work of the Reserve Bank contribute to the process of arriving at the decision on the policy repo rate. The Financial Markets Operations Department (FMOD) operationalises the monetary policy, mainly through day-to-day liquidity management operations. The Financial Market Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate. This parameter is also known as the weighted average call money rate (WACR). Monetary Policy Instruments (MPI) There are several direct and indirect instruments that are used for implementing monetary policy. 1. Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

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2. Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF. 3. Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of a range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve the transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions. 4. Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow an additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system. 5. Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate. 6. Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes. 7. Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such percent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India. 8. Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector. 9. Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively. 10. Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

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Summary Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy. REPO and CRR Rate Cuts What is REPO rate? REPO denotes Re Purchase Option – the rate by which RBI gives loans to other banks. In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period. Bank gives loan to the public at a higher rate, often 1% higher than REPO rate, at a rate known as Bank Rate (now bank rate will be 8.75%). RBI at times borrows from banks at a rate lower than REPO rate, and that rate is known as Reverse REPO rate. What is CRR rate? CRR corresponds to Cash Reserve Ratio. It corresponds to the percentage of cash each bank have to keep as cash reserve with RBI (in their current accounts) corresponding to the deposits they have. For example, say if State Bank of India(SBI) got a total deposit of Rs. 1 crore with them, they need to keep 4 % of that as cash reserve with RBI (around 4 lakh rupees). Need to reduce the CRR ? The problem with high CRR is that commercial banks lose a significant amount to be locked up in RBI lockers with out getting any interest. Banks lose profit as they cannot spend this amount as loans to the public. There was a debate regarding CRR between SBI chief and RBI governor before. A .25% reduction in CRR will pump around 18000 crore rupees back to the banks, which they can use to give loans. Why there was a fuss around REPO rate cut? There was a cry from industrial sector to reduce the REPO rate by RBI as high REPO makes the loans which the corporates take to run their business be costly. Considering that our industrial and service sector was going through a troubled phase, with low growth rate, a rate cut in REPO was in great demand. Lowering the REPO rate means cheap loans for the public, but that also means high liquidity in the market – so it can lead to inflation – which will turn the whole act counterproductive. 15

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Why did RBI lower the REPO and CRR? The fear of inflation was the reason why RBI didn’t lower REPO rate for last 9 months. But now since the inflation rates seem to have eased a little bit by various scales like CPI inflation, WPI inflation and core inflation, Reserve Bank of India has attempted to lower the REPO and CRR. More than the inflation easing factor, RBI has started to give priority to the growth of Indian economy. India’s growth rate has been decreasing (now around 5.5%) for a couple of years, due to external and internal factors. As India’s growth is mainly driven by private players, a high interest rate (REPO) cannot do any help. The capital intensive industries need cheap capital and for that they need cheap loans. Growth is coupled with development in many sectors – and growth not only provides better employment but more taxes too – which can be used for social sector initiatives by the government. Rupee Devaluation or Depreciation You might have seen news headlines like “Indian rupee falling” or “Rupee falls to Rs.70 against US dollar”. Have you ever wondered why rupee is falling? Who fixes the value of the Indian rupee as Rs.70 per 1 US dollar? We shall see in this article, the difference between Rupee Devaluation and Rupee Depreciation. Let’s also trace the value of Indian rupee with respect to US dollar from 1947 and see how a fall in rupee value affects exports and imports. Who fixes the value of Indian Rupee against US dollar? Interesting question. Do you think the Indian government fixes the value of Indian Rupee against US dollar? If not, who fixes it? RBI? No. At present, none of these entities fixes the value of Indian Rupee. Now the value of Indian Rupee (or any other currency) is determined by the market. Yes, Market! 16

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Here market means the currency market. The demand and supply forces in the currency market determine the price of each currency. If the demand for Indian currency is high, Indian rupee will appreciate (for example 1$ = Rs.40), and if demand is low, it will depreciate (for example, 1$ = Rs.70). If market forces determine the value of a currency, that type of system is called Floating Rate System. India has adopted the partial floating rate system since 1975, and from 1993 is fully dependent on Floating Rate System. This means that our Prime Minister, Finance Minister or RBI chairperson cannot fix the currency exchange rate at the click of a button. But they still have some control – through policy measures or by controlling foreign exchange reserves. Fixed Rate System vs Floating Rate System If the government or RBI fix the exchange rate of a currency (and does not allow any variations according to demand and supply forces in the market), such a system is called the Fixed Rate system. It is also called the Bretton Woods system or Pegged Currency System. India was following this kind of system till 1975 and partial controls followed until 1993. Since this currency valuation mechanism is artificial, most of the countries including India changed to Floating Rate System where currency market determines the value of a currency. Rupee Devaluation vs Rupee Depreciation The term devaluation is used when the government reduces the value of a currency under Fixed-Rate System. When the value of the currency falls under the Floating Rate System, it is called depreciation. Revaluation is a term which is used when there is a rise in currency value in relation with a foreign currency in a fixed exchange rate. In the floating exchange rate regime, the correct term would be appreciation.

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History of Indian Rupee: A comparison of Indian Rupee Value vs US dollar Remember that we were following a fixed rate system till 1975. We had partial controls on currency market till 1993 when as per IMF standards we liberalized our entire economy.            

1947: 1 US$ = 1.00 INR (Sounds interesting, huh? :-)) 1948: 1 US$ = 4.79 INR. 1965: 1 US$ = 4.79 INR. 1966: 1 US$ = 7.57 INR. 1971: 1 US$ = 8.39 INR. 1985: 1 US$ = 12.0 INR. 1991: 1 US$ = 17.9 INR. 1993: 1 US$ = 31.7 INR. 2000: 1 US$ = 45.0 INR. 2013: 1 US$ = 60.0 INR. 2017: 1 US$ = 65.0 INR. 2018: 1 US$ = 74.0 INR.

The value of the Indian Rupee: Does it matter? It should not be forgotten that the exchange rate of a currency is not really an indicator of the economic strength of a country. There are many countries including China which favours the devaluation of the currency. Also, the economic position of India in 2017 is far better than that of 1947, though there is a fall in Rupee value. At present what should worry the Finance Minister and RBI governor should not the falling Indian Rupee, but the fluctuations in the currency market. What India needs is stabilization of Indian Rupee value, be in Rs. 50, Rs.60 or Rs.70 per 1 US dollar. But if rupee is Rs.60 one day and if it Rs. 65 the next day, it shows high volatility. Such a situation is not good for the economy and that will only trigger more fall in Indian rupee. Depreciation and Appreciation of Indian Rupee: Relation with Exports and Imports UPSC has often asked this question – directly and indirectly – how does a fall in rupee affects exports and imports? Wait, before analyzing this topic let’s see one more question.Why do governments devalue their currencies?

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Answer: They do it mainly to improve the balance of trade (or in other words, to increase exports and decrease imports!). Exports vs Fall in the Indian Rupee Value: The local currency effect A devaluation means that more local currency is needed to purchase imports and exporters get more local currency when they convert the export proceeds (the foreign exchange that they get for their exports). In other words: imports become more expensive; importers lose money while exporters earn more money. This is supposed to discourage imports – and to encourage exports and, in turn, to reduce trade deficits. Clear, uh? Well, that was an explanation with respect to the local currency angle. Let’s see the same case analyzing the volume effect angle as well. Exports vs Fall in the Indian Rupee Value: The volume effect Assume that India is the exporting country and America as the importing country. India exports apples to America. Assume that India devalued India rupee from Rs. 50 =1 dollar to Rs.100 = 1 dollar. The cost of an apple in India before and after rupee devaluation is Rs.50. Now analyse what will happen.  

Before rupee devaluation: Americans will get only 1 apple for 1 dollar. After rupee devaluation: Now Americans will get 2 apples for 1 dollar.

Think from the American perspective. For them earlier with 1$, they used to get only 1 apple. Now after falling in Indian rupee, they get 2 apples. So importing from India has become really cheaper for America and they will use this case to their maximum advantage. This case will favour exporters in India in two ways: 

(1) They can now sell more apples (volume effect), trade volume will increase.

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

(2) Indian currency they get when converted is now higher than before. (It was Rs.50 before, now it is Rs.100 – for 1 US$ received)

Thus, every time there is a fall in rupee against US dollar, exporters from India are benefited. (Eg: Software companies, seafood exporters etc.) This situation badly affects importers or those who wish to visit the US for holidays as they need more local currency to get the same service or product. Unified Payment Interface (UPI) What is UPI? Unified Payment Interface (UPI) is a newly introduced platform to transfer money between any two bank accounts in India, by avoiding the existing complexities. UPI is an indigenous payment system which works with the help of a smartphone. But how is UPI different from netbanking (NEFT/RTGS/IMPS)? 

 

UPI is standardized across banks, which means you can initiate a bank account transfer from anywhere with a few clicks. This means that UPI will help you to pay directly from your bank account to different merchants without the hassle of typing your netbanking password, credit card details or IFSC code. Apart from cards, net banking and wallets, you can now pay through UPI too. Unified Payment Interface (UPI) allows paying someone as well as ‘collect’ cash from someone.

Why UPI?  

Even after introducing net-banking in India, the number of cash transaction happening in India is very high (almost 95% of all transactions). UPI is part of RBI’s efforts towards ‘Less Cash’ India.

Who developed UPI? UPI was developed by National Payment Corporation of India (NPCI) under the guidelines of RBI. UPI is based on the Immediate Payment Service (IMPS) platform.

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6 Steps to start using UPI UPI is now publicly available. Check if your bank has released an updated mobile app with UPI support already. 1. Download the UPI app of your bank from Google Play Store/Apple Apps Store and install it in your phone. 2. Set app login. 3. Create a Virtual Payment Address (VPA). Eg: Roychoudary@icici 4. Add your bank account. 5. Set MPIN. 6. Start transacting using UPI. What is MPIN? An MPIN is given to a banking customer once they register for Mobile Banking support. Chances are you have one already, but have never used it. How exactly does one make a payment transaction? For example, consider that you are trying to book tickets online for a film via your mobile. When you click to buy, the mobile website/ mobile app you used will trigger the UPI payment link. Now, you are taken to the pay screen of the UPI app. Here, the transaction information is verified and a click followed by entry of a secure PIN completes the purchase. How safe is UPI? It is safe as the customers only share a virtual address and provide no other sensitive information. The ‘virtual payment address’ is an alias to your bank account. The virtual payment addresses don’t allow your security to be compromised when a certain merchant’s account is hacked, because their database will have only a list of virtual addresses. The payment addresses are denoted by ‘account@payment_service_provider’. It offers better security than other payment methods where details like credit card numbers are sent. While using UPI, all these details are hidden as only a Virtual Payment Address (VPA) is used.

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What kind of transactions can be performed via UPI? Merchant payments, remittances, bill payments among others. Are there any limitations regarding the amount that can be transferred in a single transaction? The per transaction limit is Rs.1 lakh. UPI Payment Service Providers: Banks vs Wallets Currently, UPI has permitted only banks to be registered as Payment Service Providers (which means they can run bank accounts). But this scope can get wider and perhaps even include wallets later. The significance of Unified Payment Interface   

Facilitate Person to Business (P2B) transactions via collect payment option. This would boost business and Indian Economy overall. UPI will bring down cash circulated in the economy (currently cash in circulation is 12% of GDP). UPI will bring down annual cost of currency transactions (currently around Rs. 20000 crores)

Ok; so far good. Any negatives?   

Refunds are currently not part of UPI and the authority for all arbitration lies with NPCI. The introduction of UPI is most likely to badly affect the Wallet Companies. The per transaction limit of Rs.1 lakh may not go well with all customers/business.

Currency in Circulation vs Reserve Money vs Money Supply Will the government’s move to demonetise Rs 500 and Rs 1,000 currency notes improve the balance sheet of Reserve Bank of India (RBI)? To understand this scenario, we must learn the interplay of currency, reserve money and money supply. What is meant by ‘currency in circulation’? It is the total value of the currency (coins and paper currency) that has ever been issued by the Reserve Bank of India minus the amount that has been withdrawn by it.

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Currency in circulation comprises of: 1. currency notes and coins with the public 2. cash in hand with banks. It is a major liability component of a central bank’s balance sheet. What is reserve money (M0)? Reserve money is also called central bank money, monetary base, base money, high-powered money, and sometimes narrow money. In the most simple language, Reserve Money is Currency in Circulation plus Deposits of Commercial Banks with RBI. Reserve money equals : 1. currency in circulation plus 2. bankers’ deposits with RBI plus 3. ‘other’ deposits with RBI. It is the base level for the money supply or the high-powered component of the money supply. What is meant by ‘money supply’ (M1-M3)? The money supply is the total stock of money circulating in an economy. In general terms, it is also called broad money. In the most simple language, Reserve Money is Currency in Circulation plus Deposits in Commercial Banks. Money supply consists of: 1. total currency circulating in the public plus 2. the non-bank deposits with a commercial bank. Money supply includes deposits generated in the banking system resulting from a multiplier effect of movement of currency in the banking system as well as other forms of liquid assets. Money Aggregates: Standard Measures of Money Supply In short, there are two types of money.

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1. Central bank money (M0)- obligations of a central bank, including currency and central bank depository accounts. 2. Commercial bank money (M1-M3) – obligations of commercial banks, including current accounts and savings accounts. In the money supply statistics, central bank money is M0 while the commercial bank money is divided up into the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest. Reserve Money (M0):  

= Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.

M1: 

=Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI).

M2: 

=M1 + Savings deposits with Post office savings banks.

M3: (Broad concept of the money supply)  

= M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).

M4: 

=M3 + All deposits with post office savings banks (excluding National Savings Certificates). 24

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How does demonetisation affect reserve money and money supply? When a currency note of a particular denomination ceases to be legal tender, the central bank’s liabilities are reduced to that extent and also the amount of currency in circulation declines.

On November 8, 2016 Government of India made Rs. 500 and Rs. 1000 notes invalid. This meant that around Rs. 15 lakh crore worth of high-value legal tender being withdrawn from circulation.

So, the entire liability of Rs. 15 lakh crore due to Rs.500 and Rs.1000 notes in circulation was nullified.

But the demonetisation impact is neutralised when the demonetised currency is replaced with new accepted currency notes. You may note that, even if an individual chooses to park the cash as deposits with banks, it forms a part of the overall money supply.

Thus, say for example, if the banks or RBI got Rs.10 lakh crore as deposits after the demonetization scheme was introduced until December 31, 2016, that figure forms part of the overall money supply. You may also note that in this example Rs.5 lakh crore never made entry into the banking records.

Now the net-liability = Rs.15 lakh crore – Rs.5 lakh crore = Rs.10 lakh crore. This liability figure is less than the initial liability of Rs. 15 lakh crore. So RBI and banks gain by the demonetization move, at least on paper. Why is the currency in circulation a liability to RBI or government? Let us examine what is the status of the currency we hold in our hands. Section 26 of the Reserve bank of India Act 1934 (“RBI Act”) states as follows: (1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in 4 [India] in payment or on account for the amount expressed therein, and shall be guaranteed by the 5 [Central Government]. 25

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This means that the money the public hold in hand or in the bank is a debt guaranteed by the government (to us). Currency thus represents a ‘public debt’ owed by the government to the holders of the bank notes – the public. How will demonetisation affect the RBI’s balance sheet? If people choose not to declare and surrender their high-denomination currency notes, then RBI stands to gain to the extent that its currency liabilities are lowered. The gains it makes in the process are transferred to its reserves and then appropriated in its profit and loss account. This gives it leeway to transfer higher amounts as dividends to the government. Government Budgeting What exactly is a budget? As you know, the budget is a report presented by the government. It is a report of the government finances which includes revenues and outlays. Thus, the budget can be defined as the most comprehensive report of the government’s finances in which revenues from all the sources and outlays for all activities are consolidated. In simple terms, the budget is an annual financial statement of the revenue and expenditure of a government. Budget in the Indian Constitution The term ‘Budget’ is not mentioned in the Indian Constitution; the corresponding term used is ‘Annual Financial Statement’ (article 112). What are the constitutional requirements which make Budget necessary? 1. Article 265: provides that ‘no tax shall be levied or collected except by authority of law’. [ie. Taxation needs the approval of Parliament.] 2. Article 266: provides that ‘no expenditure can be incurred except with the authorisation of the Legislature’ [ie. Expenditure needs the approval of Parliament.]

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3. Article 112: President shall, in respect of every financial year, cause to be laid before Parliament, Annual Financial Statement. Budget Documents Do you know that Annual Financial Statement is only one of the several budget documents presented by Finance Minister? The Budget documents presented to Parliament comprise, besides the Finance Minister’s Budget Speech, the following: 1. Annual Financial Statement (AFS) – Article 112 2. Demands for Grants (DG) – Article 113 3. Appropriation Bill – Artice 114(3) 4. Finance Bill – Article 110 (a) 5. Memorandum Explaining the Provisions in the Finance Bill. 6. Macro-economic framework for the relevant financial year – FRBM Act 7. Fiscal Policy Strategy Statement for the financial year – FRBM Act 8. Medium Term Fiscal Policy Statement – FRBM Act 9. Medium Term Expenditure Framework Statement – FRBM Act 10. Expenditure Budget Volume-1 11. Expenditure Budget Volume-2 12. Receipts Budget 13. Budget at a glance 14. Highlights of Budget 15. Status of Implementation of Announcements made in Finance Minister’s Budget Speech of the previous financial year. There are also other related documents like Detailed Demands for Grants, Outcome Budget, Annual Reports and Economic Survey presented along with the budget documents in Parliament. PS: The documents shown at Serial 1, 2, 3 and 4 are mandated by Art. 112,113, 114(3) and 110(a) of the Constitution of India respectively, while the documents at Serial 6,7, 8 and 9 are presented as per the provisions of the Fiscal Responsibility and Budget Management Act, 2003. Other documents are in the nature of explanatory statements supporting the mandated documents with narrative or other content in a user-friendly format suited for quick or contextual references. Hindi version of all these documents is also presented to Parliament.

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Railway Budget Do figures related to Railways find mention in Annual Financial Statement or are they part of only Railway budget? Until 2016 (for 92 years), the budget of the Indian Railways was presented separately to Parliament and dealt with separately. Even then the receipts and expenditure of the Railways formed part of the Consolidated Fund of India and the figures relating to them are included in the ‘Annual Financial Statement’. The last Railway Budget was presented on 25 February 2016 by Mr. Suresh Prabhu. Since 2017, Railway Budget is merged with the Union Budget. Budget Presentation In India, the Budget is presented to Parliament on such date as is fixed by the President. Between 1999 to 2016, the General Budget was presented at 11 A.M. on the last working day of February. However, since 2017, the Indian Budget is presented on 1 February. In an election year, Budget may be presented twice — first to secure Vote on Account for a few months and later in full. Vote on Account The discussion on the Budget begins a few days after its presentation. If the Parliament is not able to vote the entire budget before the commencement of the new financial year (ie. within 1 month or so), the necessity to keep enough finance at the disposal of Government in order to allow it to run the administration of the country remains. A special provision is, therefore, made for “Vote on Account” by which Government obtains the Vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year. Normally, the Vote on Account is taken for two months only. But during the election year or when it is anticipated that the main Demands and Appropriation Bill will take longer time than two months, the Vote on Account may be for a period exceeding two months.

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So what exactly is Vote on Account? Vote on Account is a special provision by which the Government obtains the Vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year, usually two months. Vote on Account was widely used along with every budget before 2016 when the date of the budget presentation was the last day of February. Now vote on account is used only in special years like the election years (used along with interim budget). Vote on Account deals only with expenditure part. But the interim budget, as well as full budget, has both receipt and expenditure side. So presentation and passing of vote on account is the first stage in the budget passing process. Vote on Account is necessary for the working of the government until the period the full budget is passed. Budget Speech The Budget speech of the Finance Minister is usually in two parts. Part A deals with the general economic survey of the country while Part B relates to taxation proposals. He makes a speech introducing the Budget and it is only in the concluding part of his speech that the proposals for fresh taxation or for variations in the existing taxes are disclosed by him. The ‘Annual Financial Statement’ is laid on the Table of Rajya Sabha at the conclusion of the speech of the Finance Minister in Lok Sabha. Budget Documents Over here we will discuss about the ‘Government Budgeting basics‘, we have seen that Indian Budget is not a single document, but consists of many documents like Annual Financial Statement, Demand for Grants, Appropriation Bill, Finance Bill etc. Also, there are certain budget documents as per the requirements of FRBM act 2003. In this post, we shall go into the details of each of these documents and see what these documents are all about. Annual Financial Statement Annual Financial Statement (AFS), the document as provided under Article 112, shows estimated receipts and expenditure of the Government of India for next financial year (say, 2017-18) in relation to estimates for the previous financial year (ie 2016-17) as

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also expenditure for the year before last financial year (ie. 2015-16). The receipts and disbursements are shown under the three parts, in which Government Accounts are kept viz.,(i) Consolidated Fund, (ii) Contingency Fund and (iii) Public Account. The estimates of receipts and expenditure included in the Annual Financial Statement are for the expenditure net of refunds and recoveries, as will be reflected in the accounts. Annual Financial Statement has the following heads. 1. Statement I – Consolidated Fund of India [Receipts and Expenditure: Revenue Account; Receipts and Expenditure: Capital Account] 2. Statement IA – Expenditure charged on the Consolidated Fund of India 3. Statement 2 – Contingency Fund of India 4. Statement 3 – Public Accounts of India [Receipts and Expenditure] 5. Receipts & Expenditure of Union Territories without Legislature. Demand For Grants Article 113 of the Constitution mandates that the estimates of expenditure from the Consolidated Fund of India included in the Annual Financial Statement and required to be voted by the Lok Sabha are submitted in the form of Demands for Grants. The Demands for Grants are presented to the Lok Sabha along with the Annual Financial Statement. Generally, one Demand for Grant is presented in respect of each Ministry or Department. However, more than one Demand may be presented for a Ministry or Department depending on the nature of expenditure. In regard to Union Territories without Legislature, a separate Demand is presented for each of the Union Territories. In budget 2014-15 there were 106 Demands for Grants. Each Demand first gives the totals of ‘voted’ and ‘charged’ expenditure as also the ‘revenue’ and ‘capital’ expenditure included in the Demand separately, and also the grand total of the amount of expenditure for which the Demand is presented. This is followed by the estimates of expenditure under different major heads of account. The breakup of the expenditure under each major head between ‘Plan’ and ‘Non-Plan’ is also given. The amounts of recoveries taken in reduction of expenditure in the accounts are also shown. A summary of Demands for Grants is given at the beginning of this document, while details of ‘New Service’ or ‘New Instrument of Service’ such as formation of a new company, undertaking or a new scheme, etc., if any, are indicated at the end of the document.

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PS: For more reference on any of these budget documents refer: Key to Budget Documents by Ministry of Finance as given in indiabudget.nic.in. Appropriation Bill Under Article 114(3) of the Constitution, no amount can be withdrawn from the Consolidated Fund without the enactment of such a law by Parliament. After the Demands for Grants are voted by the Lok Sabha, Parliament’s approval to the withdrawal from the Consolidated Fund of the amounts so voted and of the amount required to meet the expenditure charged on the Consolidated Fund is sought through the Appropriation Bill. The whole process beginning with the presentation of the Budget and ending with discussions and voting on the Demands for Grants requires sufficiently long time. The Lok Sabha is, therefore, empowered by the Constitution to make any grant in advance in respect of the estimated expenditure for a part of the financial year pending completion of procedure for the voting of the Demands. The purpose of the ‘Vote on Account’ is to keep Government functioning, pending voting of ‘final supply’. The Vote on Account is obtained from Parliament through an Appropriation (Vote on Account) Bill. Finance Bill At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented in fulfillment of the requirement of Article 110 (1)(a) of the Constitution, detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution. It is accompanied by a Memorandum explaining the provisions included in it. Memorandum Explaining the Provisions in the Finance Bill To facilitate understanding of the taxation proposals contained in the Finance Bill, the provisions and their implications are explained in the document titled Memorandum Explaining the Provisions of the Finance Bill. Documents as per the requirements of FRBM act: Macroeconomic Framework Statement The Macroeconomic Framework Statement presented to Parliament under Section 3(5) of the Fiscal

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Responsibility and Budget Management Act, 2003 and the rules made thereunder contains an assessment of the growth prospects of the economy with specific underlying assumptions. It contains assessment regarding the GDP growth rate, fiscal balance of the Central Government and the external sector balance of the economy. Fiscal Policy Strategy Statement The Fiscal Policy Strategy Statement, presented to Parliament under Section 3(4) of the Fiscal Responsibility and Budget Management Act, 2003, outlines the strategic priorities of Government in the fiscal area for the ensuing financial year relating to taxation, expenditure, lending, and investments, administered pricing, borrowings and guarantees. The Statement explains how the current policies are in conformity with sound fiscal management principles and give the rationale for any major deviation in key fiscal measures. Medium-term Fiscal Policy Statement The Medium-term Fiscal Policy Statement presented to Parliament under Section 3(2) of the Fiscal Responsibility and Budget Management Act, 2003, sets out three-year rolling targets for four specific fiscal indicators in relation to GDP at market prices namely (i) Revenue Deficit, (ii) Fiscal Deficit, (iii) Tax to GDP ratio and (iv) Total outstanding Debt at the end of the year. The Statement includes the underlying assumptions, an assessment of sustainability relating to balance between revenue receipts and revenue expenditure and the use of capital receipts including market borrowings for generation of productive assets. Medium-term Expenditure Framework Statement The Medium-term Expenditure Framework Statement presented to Parliament under Section 3 of the Fiscal Responsibility and Budget Management Act, 2003 sets forth a three-year rolling target for the expenditure indicators with a specification of underlying assumptions and risks involved. The objective of the MTEF is to provide a closer integration between budget and the FRBM Statements. PS: This Statement is presented separately in the session next to the session in which Budget is presented, i.e. normally in the Monsoon Session. Explanatory Documents

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Expenditure Budget Volume-1 This document deals with revenue and capital disbursements of various Ministries/Departments and gives the estimates in respect of each under ‘Plan’ and ‘Non-Plan’. It also gives analysis of various types of expenditure and broad reasons for the variations in estimates. Expenditure Budget Volume-2 The provisions made for a scheme or a programme may spread over a number of Major Heads in the Revenue and Capital sections in a Demand for Grants. In the Expenditure Budget Vol. 2, the estimates made for a scheme/programme are brought together and shown on a net basis at one place, by Major Heads. To understand the objectives underlying the expenditure proposed for various schemes and programmes in the Demands for Grants, suitable explanatory notes are included in this volume in which, wherever necessary, brief reasons for variations between the Budget estimates and Revised estimates for the current year and requirements for the ensuing Budget year are also given. Receipts Budget Estimates of receipts included in the Annual Financial Statement are further analysed in the document “Receipts Budget”. The document provides details of tax and non-tax revenue receipts and capital receipts and explains the estimates. The document also provides the arrears of tax revenues and non-tax revenues, as mandated under the Fiscal Responsibility and Budget Management Rules, 2004. The trend of receipts and expenditure along with deficit indicators, statement pertaining to National Small Savings Fund (NSSF), statement of revenues foregone, statement of liabilities, statement of guarantees given by the government, statements of assets and details of external assistance are also included in Receipts Budget. Budget at a Glance This document shows in brief, receipts, and disbursements along with broad details of tax revenues and other receipts. This document also exhibits broad break-up of expenditure – Plan and Non-Plan, allocation of Plan outlays by sectors as well as by Ministries/Departments and details of resources transferred by the Central Government to State and Union Territory Governments. This document 33

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also shows the revenue deficit, the gross primary deficit and the gross fiscal deficit of the Central Government. The excess of Government’s revenue expenditure over revenue receipts constitutes revenue deficit of Government. The difference between the total expenditure of Government by way of revenue, capital and loans net of repayments on the one hand and revenue receipts of Government and capital receipts which are not in the nature of borrowing but which finally accrue to Government on the other, constitutes gross fiscal deficit. Gross primary deficit is measured by gross fiscal deficit reduced by gross interest payments. In the Budget documents ‘gross fiscal deficit’ and ‘gross primary deficit’ have been referred to in abbreviated form ‘fiscal deficit’ and ‘primary deficit’, respectively. This document also shows liabilities of the Government on account of securities (bonds) issued in lieu of oil and fertilizer subsidies. Highlights of Budget This document explains the key features of the Budget, inter alia, indicating the prominent achievements in various sectors of the economy. It also explains, in brief, the budget proposals for allocation of funds to be made in important areas. The summary of tax proposals is also reflected in the document. Other Documents Along with Budget Statements Detailed Demands for Grants The Detailed Demands for Grants are laid on the table of the Lok Sabha sometime after the presentation of the Budget, but before the discussion on Demands for Grants commences. Detailed Demands for Grants further elaborate the provisions included in the Demands for Grants as also actual expenditure during the previous year. A break-up of the estimates relating to each programme/organisation, wherever the amount involved is not less than 10 lakhs, is given under a number of object heads which indicate the categories and nature of expenditure incurred on that programme, like salaries, wages, travel expenses, machinery and equipment, grants-in-aid, etc. At the end of these Detailed Demands are shown the details of recoveries taken in reduction of expenditure in the accounts.

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Outcome Budget With effect from Financial Year 2007-08, the Performance Budget and the Outcome Budget hitherto presented to Parliament separately by Ministries/Departments, are merged and presented as a single document titled “Outcome Budget” by each Ministry/Department in respect of all Demands/ Appropriations controlled by them, except those exempted from this requirement. Outcome Budget broadly indicates physical dimensions of the financial budget of a Ministry/Department, indicating actual physical performance in the preceding year (2015-2016), performance in the first nine months (up to December) of the current year (2016-2017) and the targeted performance during the ensuing year (2014-2015). Annual Reports A descriptive account of the activities of each Ministry/Department during the year 2016-2017 is given in the document Annual Report which is brought out separately by each Ministry/Department and circulated to Members of Parliament at the time of discussion on the Demands for Grants. Economic Survey The Economic Survey brings out the economic trends in the country which facilitates a better appreciation of the mobilisation of resources and their allocation in the Budget. The Survey analyses the trends in agricultural and industrial production, infrastructure, employment, money supply, prices, imports, exports, foreign exchange reserves and other relevant economic factors which have a bearing on the Budget, and is presented to the Parliament ahead of the Budget for the ensuing year. Conclusion: The Budget of the Central Government is not merely a statement of receipts and expenditure. Since Independence, with the launching of Five Year Plans, it has also become a significant statement of government policy. The Budget reflects and shapes, and is, in turn, shaped by the country’s economy. For a better appreciation of the impact of government receipts and expenditure on the other sectors of the economy, it is necessary to group them in terms of economic magnitudes, for example, how 35

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much is set aside for capital formation, how much is spent directly by the Government and how much is transferred by Government to other sectors of the economy by way of grants, loans, etc. This analysis is contained in the Economic and Functional Classification of the Central Government Budget which is brought out by the Ministry of Finance separately. Difference between Full Budget and Vote on Account Rule: Executive (Government) needs the approval of Legislature (Parliament) for spending! Yes, the government cannot spend as it wishes! Even though the government collects money from the public by means of various taxes and fees, for the expenditure of the same, it needs approval from another authority – ie. Legislature. In the case of the Central government, the Legislature corresponds to the lower house of the Parliament ie. Loksabha. Where is this rule (mandate) written? Answer: Constitution of India. Article 266 of the Constitution of India mandates that Parliamentary approval is required to draw money from the Consolidated Fund of India. Besides, Article 114 (3) of the Constitution stipulates that no amount can be withdrawn from the Consolidated Fund without the enactment of a law (appropriation bill). The Parliamentary Approval takes its time! The full budget is usually passed only after long discussions. Even though the government (executive) seeks approval of expenditure for the next financial year (April 1 to March 31) in the current financial year itself, the approval from legislature takes its time. Very often, discussion and voting of demands for grants and passing of Appropriation Bill go beyond the current financial year. This was precisely the case before 2016 when the budget was presented on the last working day of February, and it was difficult to get passed within the same financial year.

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But the government needs money for its day to day functions… Since Parliament is not able to vote the entire budget before the commencement of the new financial year, the necessity to keep enough finance at the disposal of Government. A special provision is, therefore, made for “Vote on Account” by which Government obtains the Vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year. Vote on Account Vote on Account is a grant in advance to enable the government to carry on until the voting of demands for grants and the passing of the Appropriation Bill and Finance Bill. This enables the government to fund its expenses for a short period of time or until a full-budget is passed. As a convention, a vote-on-account is treated as a formal matter and passed by Lok Sabha without discussion. Vote on Account was frequently used until 2016 when the Budget was presented on the last working day of February. However, since 2017, the budget presentation date was advanced to February 1. This helped the executive to use almost 2 months time to get the full-budget passed in the same financial year. So, since 2017, Vote on Account is not usually used as part of the government budgeting process, unless in special cases like an election year. Normally, the Vote on Account is taken for two months only. The sum of the grant would be equivalent to one-sixth of the estimated expenditure for the entire year under various demands for grants. Can Vote on Account be granted for more than 2 months? Yes. During election year or when it is anticipated that the main Demands and Appropriation Bill will take longer time than two months, the Vote on Account may be granted for a period exceeding two months. For example, in 2019, Vote on Account is taken for 4 months. Difference between Full Budget and Vote on Account 

Full Budget deals with both expenditure and revenue side but Vote-onaccount deals only with the expenditure side of the government’s budget. 37

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The vote-on-account is normally valid for two months but a full budget is valid for 12 months (a financial year). As a convention, a vote-on-account is treated as a formal matter and passed by Lok Sabha without discussion. But passing for budget happens only after discussions and voting on demand for grants. A vote-on-account cannot alter direct taxes since they need to be passed through a finance bill. Under the regular Budget, fresh taxes may be imposed and old ones may go. As a convention, a vote-on-account is treated as a formal matter and passed by the Lok Sabha without discussion. But the full budget is passed only after discussions and voting on demand for grants.

What is an interim budget then? An interim budget in all practical sense is a full budget but made by the government during the last year of its term – ie. just before the election. An interim Budget is a complete set of accounts, including both expenditure and receipts. But it may not contain big policy proposals. Is it mandatory for the government to present vote on account instead of a full budget in an election year? It is not mandatory for the government to present a vote on account in an election year. Though the convention is to present an interim budget and get the fund required for spending via the vote on account route, the government (if it wishes so) can even go for a Full Budget and get the appropriation bills passed to get the finances. However, during an election year, the ruling government generally opts for a voteon-account or interim budget instead of a full budget. While technically, it is not mandatory for the government to present a vote-on-account, but it would be inappropriate to impose policies that may or may not be acceptable to the incoming government taking over in the same year. Five Year Plans before the Liberalisation In India the planned economic development begin in 1951 with the inception of first five year plan. The main motive of first five year plan was to improve the condition of agriculture in the country, because Agriculture is the backbone of the whole country. Second five year plan (based on Mahalanobis model) was dedicated to the industrial development. During this period Indian economy grow

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by Hindu Rate of Growth (term given by professor Rajkrishna) around 3.5% upto 1980s. First Five-Year Plan (1951–1956) The first Indian Prime Minister, Jawaharlal Nehru presented the first five-year plan to the Parliament of India on December 8, 1951.This plan was based on the Harrod-Domar model. The plan addressed, mainly, the agrarian sector, including investments in dams and irrigation. The agricultural sector was hit hardest by the partition of India and needed urgent attention. The total planned budget of INR 2069 crore was allocated to seven broad areas: irrigation and energy (27.2 percent), agriculture and community development (17.4 percent), transport and communications (24 percent), industry (8.4 percent), social services (16.64 percent), land rehabilitation (4.1 percent), and for other sectors and services (2.5 percent). The target growth rate was 2.1% annual gross domestic product (GDP) growth; the achieved growth rate was 3.6%. The net domestic product went up by 15%. The monsoon was good and there were relatively high crop yields, boosting exchange reserves and the per capita income, which increased by 8%. National income increased more than the per capita income due to rapid population growth. Many irrigation projects were initiated during this period, including the Bhakra Dam and Hirakud Dam. Second Five-Year Plan (1956–1961) The second five-year plan focused on industry, especially heavy industry. Unlike the First plan, which focused mainly on agriculture, domestic production of industrial products was encouraged in the Second plan, particularly in the development of the public sector. The plan followed the Mahalanobis model, an economic development model developed by the Indian statistician Prasanta Chandra Mahalanobis in 1953. The plan attempted to determine the optimal allocation of investment between productive sectors in order to maximise long-run economic growth. It used the prevalent state of art techniques of operations research and optimization as well as the novel applications of statistical models developed at the Indian Statistical Institute. The plan assumed a closed economy in which the main trading activity would be centered on importing capital goods. Hydroelectric power projects and five steel mills at Bhilai, Durgapur, and Rourkela were established. Coal production was increased. More railway lines were added in the north east. The Atomic Energy Commission was formed in 1958 with Homi J. Bhabha as the first chairman. The Tata Institute of Fundamental Research was established as a research institute. In 1957 a talent search and scholarship program was begun to find talented young students to train for work in nuclear power. Target Growth4.5% Growth achieved:4.0%. Third Five-Year Plan (1961–1966)

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The third plan stressed on agriculture and improvement in the production of wheat, but the brief Sino-Indian War of 1962 exposed weaknesses in the economy and shifted the focus towards the Defence industry or Indian army. In 1965–1966, India fought a [Indo-Pak] War with Pakistan. Due to this there was a severe drought in 1965. The war led to inflation and the priority was shifted to price stabilisation. The construction of dams continued. Many cement and fertilizer plants were also built. Punjab began producing an abundance of wheat. Target Growth: 5.6% Actual Growth: 2.4%. Fourth Five-Year Plan (1969–1974) At this time Indira Gandhi was the Prime Minister. The Indira Gandhi government nationalised 14 major Indian banks and the Green Revolution in India advanced agriculture. In addition, the situation in East Pakistan (now Bangladesh) was becoming dire as the Indo-Pakistani War of 1971 and Bangladesh Liberation War took Funds earmarked for the industrial development had to be diverted for the war effort. India also performed the Smiling Buddha underground nuclear test in 1974, partially in response to the United States deployment of the Seventh Fleet in the Bay of Bengal. The fleet had been deployed to warn India against attacking West Pakistan and extending the war. Target Growth: 5.7% Actual Growth: 3.3% Fifth Five-Year Plan (1974–1979) Stress was by laid on employment, poverty alleviation, and justice. The plan also focused on self-reliance in agricultural production and defence. In 1978 the newly elected Morarji Desai government rejected the plan. Electricity Supply Act was enacted in 1975, which enabled the Central Government to enter into power generation and transmission. Target Growth: 4.4% Actual Growth: 5.0 Sixth Five-Year Plan (1980–1985) The sixth plan also marked the beginning of economic liberalisation. Prize controls were eliminated and ration shops were closed. This led to an increase in food prices and an increase in the cost of living. This was the end of Nehruvian Socialism and Indira Gandhi was prime minister during this period. Family planning was also expanded in order to prevent overpopulation. Target Growth: 5.2% Actual Growth: 5.4% Seventh Five-Year Plan (1985–1990) The Seventh Plan marked the comeback of the Congress Party to power. The plan laid stress on improving the productivity level of industries by upgrading of technology. The main objectives of the 7th five-year plans were to establish growth in areas of increasing economic productivity, production of food grains, and generating employment. 40

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As an outcome of the sixth five-year plan, there had been steady growth in agriculture, control on rate of Inflation, and favourable balance of payments which had provided a strong base for the seventh five Year plan to build on the need for further economic growth. The 7th Plan had strived towards socialism and energy production at large. Target Growth: 5.0% Actual Growth: 5.7% Five Year Plans after the Liberalization The Planning Commission was set up in March, 1950 by a Resolution of the Government of India. The economy of India is based on planning through its fiveyear plans. Five year plans are developed, executed and monitored by the Planning Commission (Prime Minister is the ex-official Chairman). Now the planning commission is being replaced by the NITI Ayog (National Institution for Transforming India). Till date 12 five year plans have been launched by the planning Commission. The final approval to any five year plan is given by the National Development Council (NDC). Eighth Five-Year Plan (1992–1997) Time of 1989–91 was of political chaos that leads to economic instability in India and hence no five-year plan was implemented. Between 1990 and 1992, there were only Annual Plans. In 1991, India faced a crisis in Foreign Exchange (Forex) reserves, left with reserves of only about US$1 billion. Thus, under pressure, the country took the risk of reforming the socialist economy. P.V. Narasimha Rao was the twelfth Prime Minister of the Republic of India and head of Congress Party, and led one of the most important administrations in India's modern history overseeing a major economic transformation and several incidents affecting national security. At that time Dr. Manmohan Singh (currently, Prime Minister of India) launched India's free market reforms that brought the nearly bankrupt nation back from the edge. It was the beginning of privatisation and liberalisation in India. Modernization of industries was a major highlight of the Eighth Plan. Under this plan, the gradual opening of the Indian economy was undertaken to correct the burgeoning deficit and foreign debt. Meanwhile India became a member of the World Trade Organization on 1 January 1995.This plan can be termed as Rao and Manmohan model of Economic development. An average annual growth rate of 6.78% against the target 5.6% was achieved. Ninth Five-Year Plan (1997–2002) Ninth Five Year Plan India runs through the period from 1997 to 2002 with the main aim of attaining objectives like speedy industrialization, human development, full-scale employment, poverty reduction, and self-reliance on domestic resources.

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During the Ninth Plan period, the growth rate was 5.35 per cent, a percentage point lower than the target GDP growth of 6.5 per cent.

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Tenth Five-Year Plan (2002–2007) Attain 8% GDP growth per year. Reduction of poverty ratio by 5 percentage points by 2007. Providing gainful and high-quality employment at least to the addition to the labour force. Reduction in gender gaps in literacy and wage rates by at least 50% by 2007. 20 point program was introduced. Target growth: 8% Growth achieved: 7.8% Eleventh Five-Year Plan (2007–2012) The eleventh plan has the following objectives: Income & Poverty Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12th Plan in order to double per capita income by 2016–17 Increase agricultural GDP growth rate to 4% per year to ensure a broader spread of benefits Create 70 million new work opportunities. Reduce educated unemployment to below 5%. Raise real wage rate of unskilled workers by 20 percent. Reduce the headcount ratio of consumption poverty by 10 percentage points. Education Reduce dropout rates of children from elementary school from 52.2% in 2003–04 to 20% by 2011–12 Develop minimum standards of educational attainment in elementary school, and by regular testing monitor effectiveness of education to ensure quality Increase literacy rate for persons of age 7 years or above to 85% Lower gender gap in literacy to 10 percentage point Increase the percentage of each cohort going to higher education from the present 10% to 15% by the end of the plan Health Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per 1000 live births Reduce Total Fertility Rate to 2.1 Provide clean drinking water for all by 2009 and ensure that there are no slip-backs Reduce malnutrition among children of age group 0–3 to half its present level Reduce anaemia among women and girls by 50% by the end of the plan Women and Children Raise the sex ratio for age group 0–6 to 935 by 2011–12 and to 950 by 2016–17 Ensure that at least 33 percent of the direct and indirect beneficiaries of all government schemes are women and girl children

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Ensure that all children enjoy a safe childhood, without any compulsion to work Infrastructure Ensure electricity connection to all villages and BPL households by 2009 and round-the-clock power. Ensure all-weather road connection to all habitation with population 1000 and above (500 in hilly and tribal areas) by 2009, and ensure coverage of all significant habitation by 2015 Connect every village by telephone by November 2007 and provide broadband connectivity to all villages by 2012 Provide homestead sites to all by 2012 and step up the pace of house construction for rural poor to cover all the poor by 2016–17 Environment Increase forest and tree cover by 5 percentage points. Attain WHO standards of air quality in all major cities by 2011–12. Treat all urban waste water by 2011–12 to clean river waters. Increase energy efficiency by 20% Target growth: 8.4% Growth achieved: 7.9%. Twelfth Five-Year Plan (2012-2017) The 12th five year plan (2012-17) document that seeks to achieve annual average economic growth rate of 8.2 per cent, down from 9 per cent envisaged earlier, in view of fragile global recovery. 12th five-year plan is guided by the policy guidelines and principles to revive the following Indian economy, which registered a growth rate of meagre 5.5 percent in the first quarter of the financial year 201213. The plan aims towards the betterment of the infrastructural projects of the nation avoiding all types of bottlenecks. The document presented by the planning commission is aimed to attract private investments of up to US$1 trillion in the infrastructural growth in the 12th five-year plan, which will also ensure a reduction in subsidy burden of the government to 1.5 percent from 2 percent of the GDP (gross domestic product). The UID (Unique Identification Number) will act as a platform for cash transfer of the subsidies in the plan. The plan aims towards achieving a growth of 4 percent in agriculture and to reduce poverty by 10 percentage points by 2017. The main aim of this plan is to achieve Faster, More Inclusive and Sustainable Growth. How to Measure Human Development Index? The Human Development Index (HDI) is a composite statistics of life expectancy, education, and income indices to rank countries into four tiers of human development. It was created by economist Mahbub-ul-Haq, followed by economist Amartya Sen in 1990, and published by the United Nations Development Programme (UNDP).

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In its 2010 Human Development Report, the UNDP began using a new method of calculating the HDI. The following three indices are used: 1. Life Expectancy Index 2. Education Index: It includes a. Mean Years of Schooling Index b. Expected Years of Schooling Index 3. Income Index

1. 2. 3. 4. 5.

Finally, the HDI is the geometric mean of the above three normalized indices Among 187 countries ranked in the Human Development Report, India comes in at a dismal 135th (2014) in the main composite index. HDR 2011 makes the important point that environmental degradation and climate change will exacerbate inequalities, a trend already evident. The report said India's Human Development Index (HDI) value for 2011 was 0.547 — positioning the country in the ‘medium human development category'. Neighbouring Pakistan was ranked at 145 (0.504) and Bangladesh at 146 (0.500). It said between 1980 and 2011, India's HDI value increased from 0.344 to 0.547, an increase of 59 per cent or an average annual increase of about 1.5 per cent. Computing the HDI: To construct the Index, fixed minimum and maximum values have been established for each of the indicators: i. Life expectancy at birth: 25 years and 85 years. ii. General literacy rate: 0 per cent and 100 per cent. iii. Real GDP per capita (PPP$); PPP$ 100 and PPP$ 40,000. Individual indices are computed first on the basis of a given formula. HDI is a simple average of these three indices and is derived by dividing the sum of these three indices by 3. With normalization of the values of the variables that make up the HDI, its value ranges from 0 to 1. The HDI value for a country or a region shows the distance that it has to travel to reach the maximum possible value of 1 and also allows intercountry comparisons. Inequality-adjusted HDI: The 2010 Human Development Report was the first to calculate an Inequalityadjusted Human Development Index (IHDI). The HDI represents a national average 44

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of human development achievements in the three basic dimensions making up the HDI: Health, education and income. Like all averages, it conceals disparities in human development across the population within the same country. Two countries with different distributions of achievements can have the same average HDI value. The HDI takes into account not only the average achievements of a country on health, education and income, but also how those achievements are distributed among its citizens by “discounting” each dimension’s average value according to its level of inequality. Sustainable Development: Background, Definition, Pillars and Objectives The term Sustainable Development was used by the Brundtland Commission which has become the most often-quoted definition of Sustainable Development: "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs". Sustainable Development ties together concern for the carrying capacity of natural systems with the social challenges faced by humanity. As early as the 1970s, "sustainability" was employed to describe an economy "in equilibrium with basic ecological support systems". Ecologists have pointed to The Limits to Growth. The concept of Sustainable Development has in the past most often been broken into three constituent parts: Environmental sustainability, Economic Sustainability and sociopolitical Sustainability. Green Development is generally differentiated from Sustainable Development in that Green development prioritizes what its proponents consider to be environmental sustainability over economic and cultural considerations. Proponents of Sustainable Development argue that it provides a context to improve overall sustainability where cutting edge Green Development is unattainable. Inclusive green growth is the pathway to Sustainable Development. It is the only way to reconcile the rapid growth required to bring developing countries to the level of prosperity which they aspire, meet the needs of the more than nearly 1 billion people still living in poverty, and fulfill the imperative requirement of a better Global Environment. Three Pillars of Sustainability The three pillars of sustainability are a powerful tool for defining the Sustainable Development problem. This consists of three parameters: Economic, Social, and Environmental pillars. If any one pillar is weak then the system as a whole is unsustainable. Two popular ways to visualize the three pillars are shown in the figure below: Why this is Important? 45

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Social Sustainability Social Sustainability is the ability of a social system, such as a country, family, or organization, to function at a defined level of social well-being and harmony indefinitely. Problems like war, endemic poverty, widespread injustice, and low education rate are symptoms of a system that is socially unsustainable. Environmental Sustainability Environmental Sustainability is the ability of the environment to support a defined level of environmental quality and natural resource extraction rates indefinitely. This is the world's biggest actual problem, though, since the consequences of not solving the problem now are delayed, the problem receives too low a priority to be solved. Economic Sustainability Economic Sustainability is the ability of an economy to support a defined level of economic production indefinitely. Since the Great Recession of 2008 this is the world's biggest apparent problem which endangers progress due to environmental sustainability problem.

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Types of Index Gender Inequality Index The Gender Inequality Index (GII) is a new index that was introduced in the 2010 Human Development Report’s 20th anniversary edition by the United Nations Development Programme (UNDP) for the measurement of gender disparity. According to the UNDP, this index is a composite measure which captures the loss of achievement within a country due to gender inequality and uses three dimensions to do so: (i) Reproductive health, (ii) Empowerment, and (iii) Labour market participation. The new index was introduced as an experimental measure to rectify the shortcomings of the previous, and no longer used indicators, the Gender Development Index (GDI) and the Gender Empowerment Measure (GEM), both of which were introduced in the 1995 Human Development Report. The GII's dimension of reproductive health has two indicators: (i) The Maternal Mortality Ratio (MMR) and (ii) The Adolescent Fertility Rate (AFR) The empowerment dimension is measured by two indicators: (i) The share of parliamentary seats held by each sex and (ii) Higher education attainment levels The labour market dimension is measured by women's participation in the workforce. This dimension accounts for paid work, unpaid work, and actively looking for work. According to the Human Development Report 2011, India ranks 129 out of 146 countries on the Gender Inequality Index, below Bangladesh and Pakistan, which are ranked at 112 and 115, respectively Among BRICS (Brazil, Russia, India, China, South Africa) nations, India has the highest inequalities in human development Multidimensional Poverty Index

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The Multidimensional Poverty Index (MPI) was developed in 2010 by Oxford Poverty & Human Development Initiative and the United Nations Development Programme and uses different factors to determine poverty beyond income-based lists. It replaced the previous Human Poverty Index. The MPI is an index of acute multidimensional poverty. It shows the number of people who are multidimensionality poor (suffering deprivations in 33.33% of weighted indicators) and the number of deprivations with which poor households typically contend. It reflects deprivations in very rudimentary services and core human functioning for people. The index uses the same three dimensions as the Human Development Index: (i) Health, (ii) Education, and (iii) Standard of living. These are measured using 10 indicators. Dimensions Health

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Child Mortality Nutrition Years of school Children enrolled Cooking fuel Toilet Water Electricity Floor Assets

Technological Achievement Index (TAI) The Technology Achievement Index (TAI) is used by the UNDP (United Nations Development Programme) to measure how well a country is creating and diffusing technology and building a human skill base, reflecting capacity to participate in the technological innovations of the network age. The TAI focuses on four dimensions of technological capacity: (i) Creation of technology, (ii) Diffusion of recent innovations, (iii) Diffusion of old innovations, and (iv) Human skills. Technology creation: Measured by the number of patents granted to residents per capita and by receipts of royalties and license fees from abroad per capita Diffusion of recent innovations: Measured by the number of Internet hosts per capita and the share of high-technology and medium-technology exports in total goods exported Diffusion of old innovations: Measured by telephones (mainline and cellular) per capita and electricity consumption per capita Human skills: Measured by the mean years of schooling in the population aged 15 and older and the gross tertiary science enrolment ratio

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Human Development Index (HDI) The Human Development Index (HDI) is a composite statistics of life expectancy, education, and income indices to rank countries into four tiers of human development. It was created by economist Mahbub-ul-Haq (1995) followed by economist Amartya Sen, published by the United Nations Development Programme. In its 2010 Human Development Report, the UNDP began using a new method of calculating the HDI. The following three indices are used: 1. Life Expectancy Index 2. Education Index: It includes I. Mean Years of Schooling Index II. Expected Years of Schooling Index 3. Income Index (Standard of Living) Definition: Poverty & Poverty Line in India The Planning Commission of India (Now NITI Aayog) periodically estimates poverty lines and poverty ratios for each year for which Large Sample Surveys on Household Consumer Expenditure have been conducted by the National Sample Survey Office (NSSO) of the Ministry of Statistics and Programme Implementation. Normally these surveys are conducted on quinquennial basis (Every 5 years). However the last quinquennial survey in this series was conducted in 2009-10 (NSS 66th round), since 2009-10 was not a normal year because of a severe drought in India, the NSSO repeated the large scale survey in 2011-12 (NSS 68th round). How Poverty is defined? In India, defining a poverty line has been a controversial issue, especially since mid1970s when the first such poverty line was created by the erstwhile Planning Commission. It was based on minimum daily requirement of 2,400 and 2,100 calories for an adult in rural and urban areas, respectively. Economists such as DT Lakdawala and later YK Alagh, among others, were involved in working out the poverty line from time to time. Recently, some modifications were made considering other basic requirements of the poor, such as housing, clothing, education, health, sanitation, conveyance, fuel, entertainment, etc, thus making the poverty line more realistic. This was done by Suresh Tendulkar (2009) and C Rangarajan (2014) during the UPA regime. The Tendulkar committee stipulated a benchmark daily per capita expenditure of R27 and R33 in rural and urban areas, respectively, and arrived at a cut-off of about 22% of the population below poverty line. It sparked of a furious row, as these numbers were considered unrealistic and too low. Later, the Rangarajan 48

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committee raised these limits to Rs.32 and Rs.47, respectively, and worked out poverty line at close to 30%. Poverty Line The old formula for estimating the poverty line is based on the desired calorie requirement. Food items such as cereals, pulses, vegetables, milk, oil, sugar etc. together provide these needed calories. The calorie needs vary depending on age, sex and the type of work that a person does. The accepted average calorie requirement in India is 2400 calories per person per day in rural areas and 2100 calories per person per day in urban areas. Since people living in rural areas engage themselves in more physical work, calorie requirements in rural areas are considered to be higher than urban areas. On the basis of these calculations, for the year 2000, the poverty line for a person was fixed at Rs 328 per month for the rural areas and Rs 454 for the urban areas. In this way in the year 2000, a family of five members living in rural areas and earning less than about Rs 1,640 per month will be below the poverty line Poverty Line Estimates and Controversy According to the latest estimates of the Commission, people with the daily consumption of more than Rs 28.65 in cities and Rs 22.42 in rural areas are not poor. It has been criticised by various “Social Activist” as a retrograde measure. According to it the number of poor in India has declined to 34.47 crore in 2009-10 from 40.72 crore in 2004-05 as per the estimates based on Tendulkar panel methodology which factors in spending on health and education, besides the calorie intake. Poverty Line Definition in India The data pegged the poverty ratio at 29.8% of the population in 2009-10, down from 37.2% in 2004-05. However, in recent times, various committees led by economists have come up with different ways to measure the extent of poverty. The official line delivers a poverty rate of around 32% of the population. A committee under Suresh Tendulkar estimated it at 37%, while another led by NC Saxena said 50%, and in 2007 the Arjun Sengupta commission identified 77% of Indians as "poor and vulnerable". The World Bank's PPP estimate of Indian poverty was higher than 40% in 2005, while the Asian Development Bank arrived at almost 50%. The UNDP's Multidimensional Poverty Index finds the proportion of the poor to be higher than 55%. Goods and Services Tax (GST) To ensure the similar tax structure in the country the central government has implemented the GST in the country since July 1, 2017. As of now there are 5 types of GST rates in the country. These rates are; 0,5,12,18 and 28 percent. Rationale behind moving towards GST:

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Presently, the Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas. This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry. Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is cascading of taxes due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’. The introduction of GST would mark a clear departure from the scheme of distribution of fiscal powers envisaged in the Constitution. The proposed dual GST envisages taxation of the same taxable event, i.e., supply of goods and services, simultaneously by both the Centre and the States. Therefore, both Centre and States will be empowered to levy GST across the value chain from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no ‘tax on tax’ in the country. Destination-Based Consumption Tax: GST will be a destination-based tax. This implies that all SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides. Central Taxes to be subsumed: i. Central Excise Duty ii. Additional Excise Duty iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act iv. Service Tax v. Additional Customs Duty, commonly known as Countervailing Duty (CVD) 50

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vi. Special Additional Duty of Customs-4% (SAD) vii. Cesses and surcharges in so far as they relate to supply of goods and services. State Taxes to be subsumed: i. VAT/Sales Tax ii. Central Sales Tax (levied by the Centre and collected by the States) iii. Entertainment Tax iv. Octroi and Entry Tax (all forms) v. Purchase Tax vi. Luxury Tax vii. Taxes on lottery, betting and gambling viii. State cesses and surcharges in so far as they relate to supply of goods and services. All goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST. Salient features of the Constitution (122nd) Amendment Bill, 2014: are as follows:1. GST, or Goods and Services Tax, will subsume central indirect taxes like excise duty, countervailing duty and service tax, as also state levies like value added tax, octroi and entry tax, luxury tax. 2. The final consumer will pay only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. 3. Petroleum and petroleum products have been constitutionally included as ‘goods’ under GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, viz. Sales Tax/VAT and CST by the States, and excise duty the Centre, will continue to be levied in the interim period. 4. Taxes on tobacco and tobacco products imposed by the Centre shall continue to be levied over and above GST. 5. In case of alcoholic liquor for human consumption, States would continue to levy the taxes presently being levied, i.e., State Excise Duty and Sales Tax/VAT. 6. It will have two components - Central GST levied by the Centre and State GST levied by the states. 51

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7. However, only the Centre may levy and collect GST on supplies in the course of inter-state trade or commerce. The tax collected would be divided between the Centre and the states in a manner to be provided by parliament, on the recommendations of the GST Council. 8. The GST Council is to consist of the union finance minister as chairman, the union minister of state of finance and the finance minister of each state. 9. The bill proposes an additional tax not exceeding 1% on inter-state trade in goods, to be levied and collected by the Centre to compensate the states for two years, or as recommended by the GST Council, for losses resulting from implementing the GST. GST Compensation: Due to a shift from origin based to destination based indirect tax structure, some States might face drop in revenue in the initial years. To help the States in this transition phase, the Centre has committed to compensate all their losses for a period of 5 years. Accordingly, clause 19 has been inserted in the Constitution (122nd) Amendment Bill, 2014 to provide for compensation to States by law, on the recommendation of the Goods and Services Tax Council, for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. What is GST Bill and how will it affect the life of a Common Man? The GST (Goods and Service Tax) bill was passed by Indian Parliament on August 8, 2016. After a few more formalities, the bill will finally become a law. This single tax will replace all the existing indirect taxes. Due to this single tax named GST, the prices of many commodities will decline and it is also expected to increase the GDP (Gross Domestic Product) by 2%. The Government targets to levy this tax across the country from July 1, 2017. In this article, we have tried to elaborate upon the impacts of levying this tax on the prices of various items and the challenges expected to be faced by the Government in levying GST. What is GST Bill? GST Bill will be a landmark towards improving the tax structure in India. Goods and Services Tax is an Indirect Tax. GST is a single tax which will be levied on both goods and services. GST Bill will convert India into an integrated market and most of the indirect taxes such as Central Excise, Services tax, Vat, Entertainment, Luxury, Lottery Tax, cess implied on goods and services and surcharge etc. will be subsumed in this single integrated tax. Now onwards, there will be only one indirect tax across whole of the country i.e. GST Why GST Bill is Important? According to Indian Constitution, the authority to levy taxes on the sale of commodities lies with the State Government and the authority to levy taxes on production and services lies with the Central Government. According to the taxation structure in vogue, excise is levied on the products produced by a manufacturer and custom duty is levied when they import. When the commodity is

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sold in Indian market, Sales Tax is levied on the products. In this way, there are multiple taxes at every step in the present system of taxation which means taxes are levied on the taxes itself which is also known as cascading effect. Therefore, Government’s main objective while introducing the Goods and Services Tax is to bring uniformity in the taxation across the country. What is the structure of GST?

GST will work as per the details given below: First level: (Manufacturing) • An industrialist buys leather worth Rs. 100. • It also includes the indirect tax of Rs. 10. • He manufactures shoes from this leather. It costs him about Rs. 30. • He fixes the price of final product i.e. Shoes at Rs. 130. Now a tax is levied on it at the rate of 10%. • As per the tax rate of 10%, the tax comes to Rs. 13. • He had already paid Rs. 10 as tax while buying the leather, now he has to pay Rs. 13 - Rs. 10= Rs. 3 as GST. Second level: (Wholesaler): • Now the shoes reach the wholesaler who paid Rs. 130 as the price. • He adds his profit of Rs. 20 to it and decides to sell it at Rs. 150 • Now a 10% tax on Rs. 150 comes to Rs. 15 • Since he has already paid Rs. 13, now he will give only Rs. 15- Rs. 13 = Rs. 2 as GST. Third Level: (Retailer):• Wholesaler sold the shoes to retailer for Rs. 150. • Retailer does the packaging and adds his profit which is Rs. 10. • Now the price of the shoes becomes Rs. 160. 53

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• This Rs. 160 cost is taxed at the rate of 10% which sums to Rs. 16. • Since up to the level of wholesaler, Rs. 15 have already been paid as tax, therefore retailer has to pay only Rs. 16-Rs. 15=Rs. 1 as GST. Total GST comes to:• Total tax levied on the shoes at three different levels=10+3+2+1 =16 • Now the final price of the shoes is fixed at Rs.150 +16= Rs. 166 Which taxes will be removed after the debut of GST? Central Taxes• Central Excise duty • Duties of excise (on medicines and other related products) • Additional duties of excise (On products of special importance) • Additional duties of excise (Tax on textiles and related products) • Additional duties of customs • Service Tax • Cess and Surcharge levied on Goods and Services State Taxes:• VAT • Central Sales Tax • Purchase tax • Luxury Tax • Entertainment Tax • Taxes levied on advertisements • Taxes levied on lottery, Betting and Gambling • Cess and Surcharge levied on Goods and Services Impact of GST on General Public What will be the impact of GST on consumers? Instead of multiple taxes, there will be a single tax which will cause the prices of commodities to fall. Commodities on which VAT and Excise duty both are levied will also be cheaper. However, commodities on which there is already a single tax such as excise duty or customs duty or Service tax or VAT, may become costlier as the rate at which GST will be levied is about 17-18% which is higher in comparison to the present tax rates. The commodities which will be cheaper after implementation of GST are:• Cars • Utility vehicles • Two wheelers • Movie Tickets • Fans and Lighting • Water Heaters • Air Coolers • Paints • Cements • Television 54

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• Fridge • Mobile handsets • Property Commodities which will have a price surge after implementation of GST are the followings: • Air Tickets • Hotel and Restaurants Bills • Mobile bills • Train tickets • Cigarettes • Clothing and garments • Branded Jewellery • Courier services • Taxis and cabs Impact of GST on Businessmen:At present, the businessmen have to pay different types of indirect taxes such as sales tax on trading, service tax on services, excise duty on manufacturing of goods etc. Due to this, the businessmen have to fulfill many taxation parameters which creates hurdle in smooth business. What are the benefits of GST? 1. Goods and Services tax will bring uniformity in the tax structure across the country. 2. Through its implementation, GDP will grow by about 2%. 3. It will also help curbing the tax evasion by many. 4. GST will bring transparency in the taxation system as everything will be online. 5. Tax grievances by the business man and general public will be reduced. 6. There will not be the need for many taxation laws and no requirement for the regulators as well. Challenges in implementation of GST: 1. How the revenue deficit to States would be compensated? Whether the States will accept the offered compensation? 2. Who will be authorised to increase or decrease tax rate. 3. The government machinery to implement GST is not ready yet. How the training will be imparted to the employees of tax authorities to implement the tax is yet to be decided. 4. Which commodities are to be kept out of ambit of GST yet to be finalized between the Centre and States? 5. The issue of division of taxes between the Centre and States is yet to be resolved. Common FAQs about Goods and Service Tax (GST) Bill 1. Question: What will be the benefits of GST? Answer: At present the same commodity is sold at different prices in different 55

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States. The reason behind it is the different kinds of taxes levied in various States and their slabs are different. Now things will change. GST will be levied at the point of manufacturing of goods itself and no taxation such as customs, excise etc, would be levied later. Therefore, prices would be uniform across the country. In States where the tax slabs are very high, commodities will be cheaper by implementation of GST. 2. Question: Through the GST implementation, the command of States over many taxes will lose. Who will compensate the States for the same? Answer: After implementation of GST, businessman, Producers, shopkeepers and central Government all will be benefitted. However, States may lose some revenue which will be fully compensated by the Central Government during the first three years. In the fourth and fifth year, about 75% and 50 % loss of State Governments would be respectively borne by Centre. The Central Government has agreed to make the desired constitutional provision in this regard. For this purpose, 122nd constitutional amendment is passed by the parliament. 3. Question: How the Government would be benefitted by GST? Answer: The GDP is expected to increase by 2% with the implementation of GST. This will happen as a result of the suppression of tax evasion. Since there are multiple taxes at present so tax evasion and tax theft is common and easily done. Tax deposit would be easier in GST and therefore the business persons would be more motivated in submission of taxes on time. This will increase the income of Government. Business class would also get rid of multiple taxes and tax related disputes will be less. 4. Question: How the GST would be levied? Answer: GST will be deposited online. The tax will be levied on a commodity at its manufacturing point only. When the tax is deposited for a commodity, this will be immediately informed to all the GST centers. After this stage, the wholesaler, retailer or consumers need not give any tax on the same product. If the goods are transported from one State to another, then there is no need to pay the octroi on such an item. So the long queues at the borders of States will fade away with the implementation of this tax. 5. Question: Who will decide the slabs of GST? Answer: GST council is a constitutional body devised to figure out the decisions with regard to Goods and Services Tax. GST council will consist of the representatives of both Centre and State. Finance Minister will head the council. GST council will recommend about the tax slabs, rebate in tax, tax issues, and other provisions therein. Commodities which will not be covered under the ambit of GST:• Cooking gas • Petrol • Diesel • Air fuel

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• Natural gas • Liquor Anti Poverty & Employment Generation Programmes in India The Global Multidimensional Poverty Index-2018 released by the UN noted that 271 million people moved out of poverty between 2005/06 and 2015/16 in India. The poverty rate in the country has nearly halved, falling from 55% to 28% over the ten-year period. Still a big part of the population in india is living Below the Povert Line. As per Tendulkar Committee this estimation is around 21.9% of the total population of the country. Anti poverty measures and Employment Generating programmes are: 1. Integrated Rural Development Programme (IRDP): The Integrated Rural Development Programme (IRDP), which was introduced in 1978-79 and universalized from 2nd October, 1980, aimed at providing assistance to the rural poor in the form of subsidy and bank credit for productive employment opportunities through successive plan periods. On 1st April, 1999, the IRDP and allied programmes were merged into a single programme known as Swarnajayanti Gram Swarozgar Yojana (SGSY). The SGSY emphasizes on organizing the rural poor into self-help groups, capacity-building, planning of activity clusters, infrastructure support, technology, credit and marketing linkages. 2. Jawahar Rozgar Yojana/Jawahar Gram Samriddhi Yojana: Under the Wage Employment Programmes, the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP) were started in Sixth and Seventh Plans. The NREP and RLEGP were merged in April 1989 under Jawahar Rozgar Yojana (JRY). The JRY was meant to generate meaningful employment opportunities for the unemployed and underemployed in rural areas through the creation of economic infrastructure and community and social assets. The JRY was revamped from 1st April, 1999, as Jawahar Gram Samriddhi Yojana (JGSY). It now became a programme for the creation of rural economic infrastructure with employment generation as the secondary objective. 3. Rural Housing – Indira Awaas Yojana: The Indira Awaas Yojana (LAY) programme aims at providing free housing to Below Poverty Line (BPL) families in rural areas and main targets would be the households of SC/STs. It was first merged with the Jawahar Rozgar Yojana (JRY) in 1989 and in 1996 it broke away from JRY into a separate housing scheme for the rural poor.

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4. Food for Work Programme: The Food for Work Programme was started in 2000-01 as a component of EAS full form??. It was first launched in eight drought-affected states of Chhattisgarh, Gujarat, Himachal Pradesh, Madhya Pradesh, Orissa, Rajasthan, Maharashtra and Uttaranchal. It aims at enhancing food security through wage employment. Food grains are supplied to states free of cost, however, the supply of food grains from the Food Corporation of India (FCI) godowns has been slow. 5. Sampoorna Gramin Rozgar Yojana (SGRY): The JGSY, EAS and Food for Work Programme were revamped and merged under the new Sampoorna Gramin Rozgar Yojana (SGRY) Scheme from 1st September, 2001. The main objective of the scheme continues to be the generation of wage employment, creation of durable economic infrastructure in rural areas and provision of food and nutrition security for the poor. 6. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005: It was launched on February 2, 2005. The Act provides 100 days assured employment every year to every rural household. One-third of the proposed jobs would be reserved for women. The central government will also establish National Employment Guarantee Funds. Similarly, state governments will establish State Employment Guarantee Funds for implementation of the scheme. Under the programme, if an applicant is not provided employment within 15 days s/he will be entitled to a daily unemployment allowance. Salient features of MGNREGA are: I. Right based framework II. Time bound guarantee of employment III. Labour intensive work IV. Women empowerment V. Transparency and accountability VI. Adequate funding by central government 7. National Food for Work Programme: It was launched on November 14, 2004 in 150 most backward districts of the country. The objective of the programme was to provide additional resources available under Sampoorna Grameen Rojgar Yojna. This was 100% centrally funded programme. Now this programme has been subsumed in the MGNREGA from Feb....... 2, 2006.

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8. National Rural Livelihood Mission: Ajeevika (2011) It is the skill and placement initiative of Ministry of Rural development. It is a part of National Rural Livelihood Mission (NRLM)–the mission for poverty reduction is called Ajeevika (2011). It evolves out the need to diversify the needs of the rural poor and provide them jobs with regular income on monthly basis. Self Help groups are formed at the village level to help the needy. 9. Pradhan Mantri Kaushal Vikas Yojna: The cabinet on March 21, 2015 cleared the scheme to provide skill training to 1.4 million youth with an overall outlay of Rs. 1120 crore. This plan is implemented with the help of Ministry of Skill Development and Entrepreneurship through the National Skill Development Corporation. It will focus on fresh entrant to the labour market, especially labour market and class X and XII dropouts. 10. National Heritage Development and Augmentation Yojna (HRIDAY): HRIDAY scheme was launched (21 Jan. 2015) to preserve and rejuvenate the rich cultural heritage of the country. This Rs. 500 crore programme was launched by Urban Development Ministry in New Delhi. Initially it is launched in 12 cities: Amritsar, Varanasi, Gaya, Puri, Ajmer, Mathura, Dwarka, Badami, Velankanni, Kanchipuram, Warangal and Amarvati. These programmes played/are playing a very crucial role in the development of the all sections of the society so that the concept of holistic development can be ensured in the real sense. Public Sectors in Indian Economy: Objectives, Importance, Performance and Problems In India, a public sector company is that company in which the Union Government or State Government or any Territorial Government owns a share of 51 % or more. Currently there are just three sectors left reserved only for the government i.e. Railways, Atomic energy and explosive material. Private sectors/players are not allowed to operate in these sectors. Before the independence of India, there were only a few public sector companies in the country this includes, Indian Railways, the Port Trusts, the Posts and Telegraphs, All India Radio and the Ordinance Factory are some of the major examples of the country’s public sector enterprises. However, post Indian independence, some policies for the development of the socio-economic status of the country were planned out by the then visionary leaders, where the public sector were used as a tool for the self-reliant growth of the nation’s economy. This was the reason that the second five year plan of India was solely based on the development of the different industries. Till 1990s major sectors of the economy were reserved only for the government, this caused the great loss of our precious natural resources and the whole country trapped into the great economic 59

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problem. From the very first five year plan till 1980s our country grows with the average rate of 3.5% per year (which is called Hindu rate of growth by Prof. Rajkrishna). But later on the in 1991, july our new economic policy was launched under the leadership of Mr. Manmohan Singh and P.V. Narsimha Rao. The main objectives of this new economic policy were: 1. To maintain a sustained growth in productivity 2. To enhance gainful employment 3. To achieve optimum utilization of human resources 4. To transform India into a major partner and player in the global arena. 5. To take out Indian economy from the vicious circle of poverty. 6. Open the Indian economy to interact openly with the rest of the world. The main result of this new policy was that reserved sectors were opened for the private players. Public sectors were not able to operate at its optimum pace. Objectives: The public sector aims at achieving the following objectives: To promote rapid economic development through creation and expansion of infrastructure • To generate financial resources for development • To promote redistribution of income and wealth • To create employment opportunities • To promote balanced regional growth • To encourage the development of small-scale and ancillary industries, and • To accelerate export promotion and import substitution Role of public sectors in the development of the country is explained below: • Public Sector and Capital Formation: The role of public sector in collecting saving and investing them during the planning ear has been very important. During the first and second five year plan it was 54% of the total investment, which declined to 24.6 % in the 2010-11.

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• Employment Generation: Public sector has created millions of jobs to tackle the unemployment problem in the country. The number of persons employed in the as on march 2011 was 150 lakh. Public sector has also contributed a lot towards the improvement of working and living conditions of workers by serving as a model employer. • Balanced Regional Development: Public sector undertakings have located their plants in backward parts of the county. These areas lacked basic industrial and civic facilities like electricity, water supply, township and manpower. Public enterprises have developed these facilities thereby bringing about complete transformation in the socio-economic life of the people in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, are few examples of the development of backward regions by the public sector. • Contribution to Public Exchequer: Apart from generation of internal resources and payment of dividend, public enterprises have been making substantial contribution to the Government exchequer through payment of corporate taxes, excise duty, custom duty etc. gross internal resource generation in 1990- 2000 was 36000 cr which rose to 1, 11,000 cr in 2008-09, while net profit was 92,077 cr in 2010-11. • Export Promotion and Foreign Exchange Earnings: Some public enterprises have done much to promote India’s export. The State Trading Corporation (STC), the Minerals and Metals Trading Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan Machine Tools, etc., have done very well in export promotion. • Import Substitution: Some public sector enterprises were started specifically to produce goods which were formerly imported and thus to save foreign exchange. The Hindustan Antibiotics Ltd., the Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas Commission (ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of import substitution. • Promotion of Research and Development: As most of the public enterprises are engaged in high technology and heavy industries, they have undertaken research and development programmes in a big way. Public sector has laid strong and wide base for self-reliance in the field of technical know-how, maintenance and operation of sophisticated industrial plants, machinery and equipment in the country. Expenditure on research and development reduces the cost of production. Performance of Central Public Sector Undertakings There were altogether 248 CPSEs under the administrative control of various ministries/departments as on 31 March 2011. Out of these, 220 were in operation and 28 were under construction. The share of cumulative investment (paid-up capital plus long-term loans) in all the CPSEs stood at Rs. 6,66,848 crore as on 31 March 2011 ,showing an increase of 14.8 per cent over 2009-10. The share of manufacturing in gross block, during 2010-11, was 27.8 per cent. The share of 61

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mining, electricity, and services in total investment, in terms of gross block, was 23.0 per cent, 25.2 per cent, and 23.2 per cent respectively. The net profit of (158) profit-making CPSEs stood at Rs. 1,13,770 crore in 2010-11. The net loss of (62) lossmaking enterprises, on the other hand, stood at Rs. 21,693 crore during the same period. The year also witnessed severe financial 'under-recoveries' by public-sector oil marketing companies (OMCs) as they had to keep the prices of petroleum products low in the domestic market despite high input prices of crude oil. Problems of Public Sectors: • Poor policy making and its execution • Over staffing • Wastage of resources or under utilization of resources • Higher operating cost • Lack of motivation for self improvement • Lack of proper price policy Conclusion: The expansion of the public sector was aimed at the fulfillment of our national goals, that is., the removal of poverty, the attainment of self-reliance, reduction in inequalities of income, expansion of employment opportunities, removal of regional imbalances, acceleration of the pace of agricultural and industrial development, to reduce concentration of ownership and prevent growth of monopolistic tendencies by acting as effective countervailing power to the private sector, to make the country self-reliant in modern technology and create professional, technological and managerial cadres so as to ultimately rid the country from dependence on foreign aid. But these motives could not be achieved up to the desired extent. That is why government is on the spree of privatization of these enterprises. NABARD: Functions, Roles & Achievements It is the apex banking institution to provide finance for Agriculture and rural development. National Bank for Agriculture and Rural Development (NABARD) was established on July 12, 1982 with the paid up capital of Rs. 100 cr. by 50: 50 contribution of government of India and Reserve bank of India. It is an apex institution in rural credit structure for providing credit for promotion of agriculture, small scale industries, cottage and village industries, handicrafts etc. Functions of NABARD:

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NABARD was established as a development bank to perform the following functions: 1. To serve as an apex financing agency for the institutions providing investment and production credit for promoting various developmental activities in rural areas; 2. To take measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions and training of personnel; 3. To coordinate the rural financing activities of all institutions engaged in developmental work at the field level and liaison with the Government of India, the State Governments, the Reserve Bank and other national level institutions concerned with policy formulation; and 4. To undertake monitoring and evaluation of projects refinanced by it. 5. NABARD gives high priority to projects formed under Integrated Rural Development Programme (IRDP). 6. It arranges refinance for IRDP accounts in order to give highest share for the support for poverty alleviation programs run by Integrated Rural Development Programme. 7. NABARD also gives guidelines for promotion of group activities under its programs and provides 100% refinance support for them. 8. It is setting linkages between Self-help Group (SHG) which are organized by voluntary agencies for poor and needy in rural areas. 9. It refinances to the complete extent for those projects which are operated under the ‘National Watershed Development Programme‘and the ‘National Mission of Wasteland Development‘. 10. It also has a system of District Oriented Monitoring Studies, under which, study is conducted for a cross section of schemes that are sanctioned in a district to various banks, to ascertain their performance and to identify the constraints in their implementation, it also initiates appropriate action to correct them. 11. It also supports “Vikas Vahini” volunteer programs which offer credit and development activities to poor farmers. 12. It also inspects and supervises the cooperative banks and RRBs to periodically ensure the development of the rural financing and farmers’ welfare.

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13. NABARAD also recommends about licensing for RRBs and Cooperative banks to RBI. 14. NABARD gives assistance for the training and development of the staff of various other credit insti¬tutions which are engaged in credit distributions. 15. It also runs programs for agriculture and rural development in the whole country. 16. It is engaged in regulations of the cooperative banks and the RRB’s, and manages their talent acquisition through IBPS CWE conducted across the country. Role of NABARD: 1. It is an apex institution which has power to deal with all matters concerning policy, planning as well as operations in giving credit for agriculture and other economic activities in the rural areas. 2. It is a refinancing agency for those institutions that provide investment and production credit for promoting the several developmental programs for rural development. 3. It is improving the absorptive capacity of the credit delivery system in India, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, and training of personnel. 4. It co-ordinates the rural credit financing activities of all sorts of institutions engaged in developmental work at the field level while maintaining liaison with Government of India, and State Governments, and also RBI and other national level institutions that are concerned with policy formulation. 5. It prepares rural credit plans, annually, for all districts in the country. 6. It also promotes research in rural banking, and the field of agriculture and rural development. Some of the milestones in NABARD's activities are: Business Operations: 1. Production Credit: NABARD sanctioned aggregating of 66,418 crore short term loans to Cooperative Banks and Regional Rural Banks (RRBs) during 2012-13, against which, the maximum outstanding was 65,176 crore. 2. Investment Credit: Investment Credit for capital formation in agriculture & allied sectors, non-farm sector activities and services sector to commercial banks, RRBs and co-operative banks reached a level of 17,674.29 crore as on 31 March 2013 registering an increase of 14.6 per cent, over the previous year.

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3. Rural Infrastructure Development Fund (RIDF) Through the Rural Infrastructure Development Fund (RIDF) 16,292.26 crore was disbursed during 2012-13. A cumulative amount of 1,62,083 crore has been sanctioned for 5.08 lakh projects as on 31 March 2013 covering irrigation, rural roads and bridges, health and education, soil conservation, drinking water schemes, flood protection, forest management etc. New Business Initiatives: 1. NABARD Infrastructure Development Assistance (NIDA): NABARD has set up NIDA, a new line of credit support for funding of rural infrastructure projects. The sanctions under NIDA during the year 2012-13 was 2,818.46 crore and disbursement was 859.70 crore. 2. Direct refinance assistance to CCBs for short term multipurpose credit: Direct refinance assistance to CCBs was conceived and additional line of finance for CCBs in the light of recommendations of the “Task Force on Revival of Short Term Rural Cooperative Credit Structutre, which enables the latter to raise financial resources other than from StCBs. During 2012-13, refinance assistance aggregating 3,385 crore was sanctioned to 42 CCBs and disbursement stood at 2,363.45 crore. Now it can be conclude that the Agricultural & rural development is totally dependent on the efficiency of the NABARD, which is doing its job as per the requirements of the economy. Industrial Policy  Industrial Policy Resolution, 1948 o It declared Indian economy as Mixed Economy o Small scale industries and cottage industries were given importance o Government imposed restriction on foreign investments

Industrial Policy Resolution, 1956 (IPR 1956) This policy laid down the basic framework of Industrial Policy This policy is also known as Economic Constitution of India It is classified into three sectors  Schedule A – which covers Public Sector (17 Industries)  Schedule B – covering Mixed Sector (i.e. Public & Private) (12 Industries)  Schedule C – only Private Industries o Public Sector o Small Scale Industry o Foreign Investment o o o

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Industrial Policy Statement, 1977 o

Focused on Decentralisation  It gave priority to small scale Industries  It created a new unit called “Tiny Unit”  Restrictions on Multinational Companies (MNC) were imposed

Industrial Policy Statement, 1980 Focus of this was on selective Liberalization o MRTP Act (Monopolies Restrictive Trade Practices), FERA Act (Foreign Exchange Regulation Act, 1973 were introduced. o The objective was to liberalize industrial sector to increase industrial productivity and competitiveness of the industrial sector o

New Industrial Policy,, 1991 o o

o o

o o o o

Its Objective was to provide larger role to market forces and to increase efficiency Larger roles were provided by  L – Liberalization (Reduction of government control)  P – Privatization (Increasing the role & scope of private sector)  G – Globalisation (Integration of the Indian economy with the world economy) Because of LPG, old domestic firms have to compete with New Domestic firms, MNC’s and imported items Government allowed Domestic firms to import better technology so as to improve efficiency and to have access to better technology Foreign Direct Investment ceiling was increased from 40% to 51% in selected sectors. Maximum FDI limit is 100% in selected sectors like infrastructure sectors. Foreign Investment promotion board was established. It is a single window FDI clearance agency. Technology transfer agreement was allowed under automatic route.

Phased Manufacturing Programme was a condition on foreign firms to reduce imported inputs and use domestic inputs, it was abolished in 1991. o Under Mandatory convertibility clause, while giving loans to firms, part of loan will/can be converted to equity of the company if the banks want the loan in a specified time period. This was also abolished. o Industrial licensing was abolished except for 18 industries. o Monopolies and Restrictive Trade Practices Act – Under his o

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MRTP commission was established. MRTP Act was introduced to check monopolies. MRTP Act was relaxed in 1991. o On the recommendation of SVS Raghavan committee, Competition Act 2000 was passed. It objectives were to promote competition by creating enabling environment. o Public Sector to be Diluted  Disinvestment  De-reservations – Industries reserved exclusively for public sector were reduced  Professionalization of Management of PSUs  Sick PSUs to be referred to Board for Industrial and financial restructuring. (BIFR)  Scope of MoUs was strengthened. MoU is an agreement between a PSU and concerned ministry. FINANCIAL MARKETS  Financial Markets refers to the system consisting of financial institutions,

financial instruments, regulatory bodies and organisations

 It facilitates flow of debt and equity capital

 Financial Institutions (Banks), Development financial Institutions (NABARD,

SIDBI, IDBI etc.) and Non- Banking Financial Institutions form Financial Institutions.  Financial Instruments are shares, bonds, debentures etc.  There are two types of Capital Flow – Lending and Borrowing Financial markets consist of two major segments: (l) Money Market: the market for short term funds; (2) Capital Market: the market for long and medium term funds. MONEY MARKET  According to the RBI, "The money market is the centre for dealing

mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders.  It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government." Functions of Money Market  To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary

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



 



transactions. To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc. To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry. To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy. To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this does not leads to increases in the prices.

Money Market consists of all the organizations and institutions which deal or facilitate dealings in short term debt instruments. These institutions include RBI, commercial banks, cooperative banks, non-banking financial companies like LIC, GIG, UTI and special institutions like Discount and Finance House of India (DFHI). The important money market instruments or securities (financial assets) are as follows. CAPITAL MARKET  The capital market is the market, for medium and long term funds. It

consists of all the financial institutions, organizations and instruments which deal in lending and borrowing transaction of over one year maturity.  Treasury Bills: They are promissory notes issued by the RBI on behalf of the

government as a short term liability and sold to banks and to the public. The maturity period ranges from 14 to 364 days. They are the negotiable instruments, i.e. they are freely transferable. No interest is paid on such bills but they are issued at a discount on their face value.  Commercial Bills: They are also called Trade Bills or Bills of Exchange. Commercial bills are drawn by one business firm to another in lieu of credit transaction. It is a written acknowledgement of debt by the maker directing to pay a specified sum of money to a particular person. They are short-term instruments generally issued for a period of 90 days. These are freely marketable. Banks provide working capital finance to firms by purchasing the commercial bills at a discount; this is called

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'discounting of bills'.  Commercial Paper (CP): The CP was introduced in 1990 on the recommendation of the Vaghul Committee. A commercial paper is an unsecured promissory note issued by corporate with net worth of atleast Rs 5 crore to the banks for short term loans. These are issued at discount on face value for a period of 14 days to 12 months. These are issued in multiples of Rs 1 lakh subject to a minimum of Rs 25 lakh.  Certificate of Deposit (CD): The CD was introduced in 1989 on the recommendation of the Vaghul Committee. These are issued by banks against deposits kept by individuals and institutions for a period of 15 days to 3 years. These are similar to Fixed Deposits but are negotiable and tradable. These are issued in multiples of Rs. 1 lakh subject to a minimum of Rs25 lakh.  Discount and Finance House of India Ltd.: DFHI was set up as a subsidiary of RBI in 1988 on the recommendation of the Vaghul Committee. Its objective is to stimulate activity in, the money market by providing liquidity to the money market instrument. It buys bills and short term securities from banks and financial institution thereby developing a secondary market in them. DFHI was set up as a subsidiary of RBI in 1988 on the recommendation of the Vaghul Committee. Its objective is to stimulate activity in, the money market by providing liquidity to the money market instrument. It buys bills and short term securities from banks and financial institution thereby developing a secondary market in them. CAPITAL MARKETS Primary Market

Secondary Market

* It issues security for the first time. * Existing securities are bought and sold. Example- Initial public offer and follow on public offer. * Firms issue shares to public. * One investor sells it to another investor. *Price is fixed by the firms.

* Price is fixed on the basis of demand and supply.

* Firms raise money for longterm investment. * There is no specific geographical location. * SEBI is the regulator for this market.

* Companies benefit from the secondary markets. * There is no specific geographical location. * SEBI is the regulator for this market as well.

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GILT-EDGED MARKET The Gilt-edged market refers to the market for government and semi government securities, backed by the RBI. The term gilt-edged means 'of the best quality'. It is known so because the government securities do not suffer from the risk of default and are highly liquid. The RBI is the sole supplier of such securities. These are demanded by commercial banks, insurance companies, provident funds and mutual funds. The gilt-edged market may be divided into two parts- the Treasury bill market and the government bond market. Treasury bills are issued to meet short-term needs for funds of the government, while government bonds are issued to finance long-term developmental expenditure. Stock Exchange  It is an organisation which facilitates buying and selling of shares of listed      

companies. Listed companies are those companies which are registered with stock exchange. Only old shares are bought and sold because it is a secondary market. Price is based on demand and supply. Shares are auctioned. Demand and supply of shares are constructed on the bidding of people. Demands are created by buyers.

Major stock exchanges of India Bombay Stock Exchange (BSE)  Oldest stock exchange of India as well as Asia (established in 1875)  Approximately 5000 companies are listed in BSE  Important Indices o 1. Sensex (Based on 30 companies) o 2. BSE-100 (Based on 100 companies) o 3. BSE-200 (Based on 200 companies) o 4. Dollex (Based on dollar value of BSE-200 companies) o 5. Bankex (Based on shares of banks only) o 6. Reality index (Based on shares of real estate companies) Sensex (Sensitive Index) - Most important index of BSE - Index of a stock exchange measures change in market capitalisation Criteria for selection of 30 companies  Based on shares of large companies  Shares must be frequently bought and sold

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 There should be atleast one leading company from each sector’

DISINVESTMENT Disinvestment refers to selling of equity of a PSU to a private sector companies, financial institutions, general public or workers Disinvestment versus Privatisation  Disinvestment refers to selling of equity of a PSU to a private organization

or to general public.  Privatisation refers to providing for larger role for private capital and enterprise in the functioning of an economy.  Privatisation is a wider term than disinvestment. Disinvestment is one of the means for achieving privatization.  Privatisation may result from any of the following:o Disinvestment o Denationalisation (i.e., complete sell off of a PSU) o Transfer of management and control of a PSU to the private sector o Dereservation of areas reserved for the public Sector etc. Objectives of Disinvestment  To transfer the resources from non-strategic sector to the strategic

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sector, which is much higher on social priority such as basic health, family welfare, primary education etc. To raise funds to cover up the fiscal deficit of the government. To improve efficiency of the public sector by inducing private initiative and competition. To enhance accountability of the PSUs by exposing them to the capital market. To reduce political interference by imparting market orientation to the enterprise. Bring down Government equity in all non-strategic PSUs to 26 % or lower, if necessary. Restructure and revive potentially- viable PSUs Close down PSUs which cannot be revived Fully protect the interest of workers.

The Disinvestment Process  In 1992, Government constituted a committee on the Disinvestment of

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

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shares in PSE’s headed by Dr. C. Rangarajan to recommend over the policy of disinvestment. The committee recommended that upto 49% equity of the PSUs under the exclusive participation of the state could be disinvested but for rest of the industries disinvestment can be allowed upto 74%. Further, the government constituted a five member Disinvestment Commission under the chairmanship of Shri G.V. Ramakrishnan in August 1996 to draw up a comprehensive policy for the long term disinvestment programme. The commission was mandated to advise the government on the extent, methodology, strategy and timing of disinvestment. In May 2004, the Government adopted National Common Minimum Programme, which outlined the policy of the Government with respect to the Public Sector. • General, profit making PSU’s will not be privatized. • In case of privatization of profitable PSU’s government will retain atleast 51% of the equity and the management control of the enterprise. • Navratna PSU will be retained under the public sector. • Chronically loss-making companies will be either sold-off or closed, after all workers get their legitimate dues and compensation.

All privatisations will be considered on a transparent and consultative case-by-case, basis. • A board for Reconstruction of Public Sector Enterprises (BRPSE) to be constituted.  A National Investment Fund will be established.  On 25 November 2005, the Government decided, in principle, to list large, profitable CPSEs on domestic stock exchanges and to selectively sell small portions of equity in listed, profitable CPSEs (other than the Navratnas).  The target for disinvestment is Rs 40,000 crore every year. But due to the financial crisis government is not able to meet its targets. The targets have now been reduced to Rs. 30,000 crore. •

SMALL SCALE & COTTAGE INDUSTRIES  Small Scale Industries are industries in which the investment limit is upto

certain limit which was 1 crore initially 1 crore and now has been increased to 5 crore  Cottage Industries are usually very small and are established in cottages or 72

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   

dwelling places. In Small scale industry outside labour is used whereas in cottage industries family labour is used. SSI uses both modern and traditional techniques. Cottage industries depend on traditional techniques of production. New Definitions of Micro, Small & Medium Enterprises In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes: o Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprise is defined in terms of investment in Plant & Machinery. o Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment:

Enterprises Micro Enterprises Small Enterprises Medium Enterprises

Enterprises Micro Enterprises Small Enterprises Medium Enterprises

Manufacturing Sector Investment in plant & machinery Does not exceed twenty five lakh rupees More than twenty five lakh rupees but does not exceed five crore rupees More than five crore rupees but does not exceed ten crore rupees Service Sector Investment in equipment Does not exceed ten lakh rupees: More than ten lakh rupees but does not exceed two crore rupees More than two crore rupees but does not exceed five core rupees

Contribution of Small Scale Industries  Small enterprise sector provided employment to about 225 lack people

during 2008-09. The small scale sector accounts for over 80% of the manufacturing sector's employment.  It contributed significantly towards the economic growth of the nation, with over 39% of the industrial production.  The small-scale accounts for over 34% of the total exports and about 45% of the manufacturing exports. Further over 90% of exports of the SSIs consists of non-traditional items like sports goods, readymade garments, processed foods, chemicals etc.

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 SSIs are conducive for the economic development of underdeveloped

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countries like India. Such industries are relatively labour intensive so they make economical use of the scarce capital. Small scale industries are instrumental in reducing the inequalities in wealth. In these industries capital is widely distributed in small quantities and the surplus of these industries is distributed among large number of people. Small scale industries bring about regional dispersal of industries and alleviate regional imbalances. Small-scale industries make use of local resources including the capital and entrepreneurial skills which would have remained unused for want of such industries. Small industry sector has performed exceedingly well and enabled the country to achieve a wide measure of industrial growth and diversification. In these industries relations between employers and employees are direct and cordial. There is hardly any scope of exploitation of labour and industrial disputes.

Government measures to promote small scale industries. (a) Organisational measures  Establishment of Boards  National Small Industries Corporation (NSIC)  Industrial Estates  District Industries Centre (DIC)

Financial measures  Small Industries Development

Fund (SIDF) - set up in 1986 to provide refinance (i.e. finance to the financial institutions in lieu of their lending to SSIs) assistance for development, expansion, modernization, rehabilitation of SSIs.  National Equity Fund (NEF)  Single Window Scheme (SWS) 74

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 Small Industries Development Bank of India (SIDBI):—lt was established

in October, 1989 by amalgamation of small Industries Development Fund (SIDF) and Natural Equity Fund (NEF) Fiscal Measures  Small-scale enterprises having turnover, upto 1 crore are fully exempted from

the excise duty.  Concessional rate of custom duties are levied on import of certain kind of raw materials and components used by SSIs.  Price and purchase preference is granted to products manufactured in the small-scale sector in government purchase programme. Technical assistance  Small-scale Industries Development Organisation (SIDO):—It was

established in 1954. SIDO provides technical, managerial, economic and marketing assistance to SSIs through its network of extension centres and service institutes.  Council for Advancement of Rural Technology (CART):—It was established in 1982 to provide technical assistance to rural industries.  Technology Development and Modernisation Fund (TDMF):—It was set up for the technological upgradation and modernization of the export oriented units. Reservation of items for SSIs  The policy to reserve certain items for the small-scale sector was introduced 

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in 1967. It aims to promote the SSIs by protecting them from competition with the large-scale units. In April 1967 there were only items in the reserved category which were increased in several phases to 873 in 1984. The policy of reservation was widely criticized by a number of economists because it adversely affected the production and productivity of the reserved items. So, government appointed the Abid Hussain Committee to review the policy of reservation of items for the SSIs. The committee gave its report in 1997 with the observation that the policy of reservation has actually reduced the competitiveness of the SSIs engaged in the production of such items. Only a few SSIs were involved in the production of the reserved items and their output was almost negligible in comparison of the total output of the SSIs. Thus, the committee recommended that the policy of reservation of items for SSIs should be abandoned. 75

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 Government did not abandon the policy of reservation altogether;

however government has dereserved few items in the recent past. Government dereserved 79 items in February, 2008. The total number of reserved items now stands at 35. INDUSTRIAL SICKNESS The government defined the industrial sickness for the first time in the Sick Industrial Companies (Special Provisions) Act, 1985. According to this Act, a medium or large (i.e. non-SSI) company was defined as sick if: (1) it was registered for atleast 7 years (later reduced to 5 years) (2) it incurred cash losses in the current year and the preceding year. (3) its entire net worth (i.e. paid-up capital and reserves) was eroded. A company is regarded, as weak or incipiently sick on the erosion of 50% of its peak net worth during any of preceding five financial years. The industrial sickness has been redefined in the Companies (Second Amendment) Act, 2002. Revival and rehabilitation measures The government undertake the following measures to revive and rehabilitate the sick industrial units.  Financial Assistance

As per the directions of the RBI, the commercial banks granted the following concessions to sick industrial units: (a) Rescheduling of loans and interest: (b) Grant of additional working capital: (c)Waiving off interest on loans: (d) Moratorium on payment of interest, etc.  Organisational measures

State-level inter-institutional committees — These are set up by the RBI to ensure better coordination "between the banks, state governments and other concerned financial institutions. o Special Cell: It was set up by the Rehabilitation Finance Division of the IDBI to provide assistance to the banks for revival of sick units. .  Fiscal Concessions o The government amended the Income Tax Act in 1977 to provide o

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tax benefit to those units which take over the sick units for reviving them. o The government announced a scheme for grant of excise loans to sick / weak units. Under this scheme, selected sick units are eligible for excise loans not exceeding 50% of the excise duty actually paid over the preceding 5 years Demand & Supply Demand Curve The demand curve is defined as the relationship between the price of the good and the amount or quantity the consumer is willing and able to purchase in a specified time period, given constant levels of the other determinants--tastes, income, prices of related goods, expectations, and number of buyers. Determinants of Demand 1. Price of the good 2. Taste or level of desire for the product by the buyer 3. Income of the buyer 4. Prices of related products: 

substitute products (directly competes with the good in the opinion of the

buyer; e.g. tea & coffee)  complementary products (used with the good in the opinion of the buyer; e.g. car & petrol) 5. Future expectations:

expected income of the buyer  expected price of the good. Changes that decrease demand 

decrease in price of a substitute  increase in price of a complement  decrease in income if good is normal good  increase in income if good is inferior good 

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Elasticity of Demand - a measure of the sensitivity of the quantity variable, Q, to changes in the price variable, P. Elasticity answers the question of how much the quantity will change in percentage terms for a 1% change in the price, and is thus important in determining how revenue will change. Inelastic demand curve is steep because even a large change in P causes little change in Q. An example is foodgrains – even if the price is increased a lot, people will not cut down on eating foodgrain; and if P decreases, people will not start eating more! Supply 

The quantity of a commodity which a firm is

willing to sell at a particular price  Follows the ‘supply curve’ Higher the price, greater the incentive for the firm to sell more Supply will increase Profit = Total Revenue – Total Cost Revenue = Money received through the sale of output = Price (P) x Quantity (Q) All other things remaining constant, higher price leads to higher profits Law of Demand – When price increases, quantity demanded (Qd)decreases Law of Supply – When price increases, quantity supplied (Qs) also increases Determinants of Supply 1. Cost of production – if it increases,

supply decreases Shifts in the Supply Curve If cost of production increases, quantity supplied will reduce

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Supply curve will shift leftwards If cost of production decreases, quantity supplied will increase Supply curve will shift rightwards 2. Taxes

If taxes increase, supply will reduce, and the supply curve will shift leftwards Impact of increase in cost of production and increase in taxes will be the same After the global financial crisis of 2008, government reduced taxes to boost supply This shifted the supply curve rightwards 3. Goals of Firms

Profit is not always the only goal of the firm Goal may be sales maximization or social welfare o In this case, the supply increases, and the supply curve shifts rightwards Supply may also increase due to good rainfall leading to increase in agri supply 4. Elasticity of Supply

“Responsiveness of the quantity supplied to the change in price” If the change is steep => high elasticity Elasticity (Es) = (% change in quantity supplied) / (% change in price)  If Es>1 => supply is elastic  If Es<1 => supply is

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Overall determinant is choice – more the choice with the firm, higher the elasticity e.g. Perishable quantities – firm has no option/choice to store; has to sell at any price Similarly for agricultural commodities – inelastic supply

MARKET EQUILIBRIUM 

Quantity demanded = quantity supply Equilibrium point = point of intersection of demand and supply curves 

Ideal situation – both buyers and sellers derive maximum utility and satisfaction from this point

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Markets comprise of two groups – buyers and sellers o Buyers want lower prices to maximize their satisfaction o Sellers want higher profits

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Reducing the price below the equilibrium will lead to shortage

Price will automatically go up, in the interest of both the groups  Increasing the price about the equilibrium will lead to over-supply Suppliers will reduce the price in order to sell all the stock  Consumer’s equilibrium is the situation where a consumer spends his income

on various commodities in such a manner that he gets maximum satisfaction  Producer’s equilibrium is the situation where a firm produces that level of

output which provides it maximum profits Who fixes the price in the market – buyers, sellers, government or nobody? It happens automatically through ‘market mechanism’! Also called Price Mechanism or the ‘invisible hand’ (Adam Smith) Adam Smith is called the father of Economics (Book – An inquiry into the nature and the causes of the wealth of nations, 1776) Wealth of nations is the first book on Economics, separating it from Philosophy Though Kautilya’s Arthshashtra dealt with Economics, it was primarily about statecraft Impact of change in Demand & Supply  When supply increases, price decreases (e.g. More supply of agricultural

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mandis)  When demand increases, price increases (e.g. Price of fruits

during Navratra) Why are the prices of agricultural commodities volatile? Because of inelasticity of demand & supply o You don’t start eating more just because price is less! o Producers anyway have to sell of their agri products at any price (perishable goods) Paradox of poverty of farmers 

If crops fail, farmers have nothing to sell and the farmers lose income

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But even when there are bumper crops, their income reduces! o Farmers lose in both the cases

Why do producers prefer to burn or sink the bumper crops, rather than sell? Because if they export all, the supply will increase, price will come down, bringing down overall income Justification of Minimum Support Price by the government If the govt. doesn’t intervene, both farmers and consumers will lose  With govt willing to buy ALL quantity at an attractive price (MSP), the 

farmers won’t be incurring losses o

It will reduce the fluctuation in prices, even in the case of

overproduction However, MSP is announced only for important crops (24 in number) If govt will announce MSP for all (even potato, tomato etc), it will have to buy unlimited quantity of all these Not enough storage for all the crops Only those crops which are crucial to food security are supported by MSP Difference between MSP & Procurement Price MSP = Guarantee to buy unlimited quantity at this price for selected crops

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Procurement Price = Guarantee to buy only limited quantity for distribution in PDS & buffer storage MSP = Usually below the market price (though not much below) Procurement Price = At or above the market price MSP Objective = Protect the interest of farmers in case of overproduction Procurement Price Objective = Protect the interest of both, the consumers (through PDS)& farmers MSP announced before sowing Procurement Price announced after harvest Central Govt announces both these prices on the recommendation by Commission of Agricultural Costs & Prices (CACP); state govts also consulted Pricing of Shares Share market is a form of Capital Markets, which comprises of Primary & Secondary Markets Security is the general term for all kinds of financial assets; share is also a security Primary Market – First time selling of shares - Initial Public Offer (IPO) o Sold by firms to investors Secondary Market – Existing shares are sold again o Sold by one investor to another Shareholders are owners to the extent of the total value of their shares o They get proportion of the profits (called dividends) in return o They can’t sell it back to the company (usually) – can only transfer it to other investors Primary Market – price determined by the company Secondary Market – price determined by Demand & Supply equations o The place where the transactions between buyers & sellers happen is called stock exchange Money given to the company in order to invest in long term growth o Enables people to convert the shares into cash (provides liquidity to the existing securities) o

SEBI regulates both, primary and secondary markets In a stock market, shares are auctioned

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o

Buyers created demand, sellers create supply

Demand curves are constructed on the basis of bids placed by interested buyers Supply curves are constructed on the basis of the willingness of the sellers to sell at a particular price Impact of positive news on share price Buyers will become optimistic about the company’s prospects Demand will increase, shifting the demand curve rightwards This increases the price But fewer sellers will be there because they will hold on to the shares (good future prospects) Supply curve will shift leftwards Therefore price will go up Indices of Stock Exchanges Shows performance of the companies listed on that stock

exchange

through a representative group of companies (BSE – Sensex, comprising of 30 stocks; NSE – Nifty, comprising of 50 stocks) Market Capitalization = Number of shares x Share Price Demand & Supply depends on the perception of the investors regarding future performance of the company o

Perception of the future depends on – 1) Past & current performance of the company, 2) Govt Policy (liberal policy will help the company’s performance), 3) Foreign Investment (if its high, the share price will go up), 4) Global factors (e.g. 2008 Financial Crisis caused a global crash of stock markets), 5) Macro Economic Factors (GDP, Inflation) and 6) Political Factors

If the Sensex goes up, can we say with certainty that the economic performance of the country will be good in the future? We cannot be SURE, but chances are high that the overall performance will be good Stock markets are based on perception and sentiments – they are right most of the time, but not all the time. Financial Inclusion The process which ensures access to financial services to all

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sections of the society especially vulnerable/weaker sections.

Government measures in the pre-reform era 1. 2. 3. 4. 5. 6. 7. 8. 9.

Nationalisation of Banks (in 1969, 14 commercial banks were nationalised) Priority Sector Lending Policy Lead Bank scheme Service Area scheme Establishment of Regional Rural Banks NABARD was established in 1982 Cooperative Banks SIDBI was established in 1989 SHG – bank linkage group

Latest Measures by the Government to achieve financial inclusion 1. 2. 3. 4. 5. 6. 7.

No frills account Business Correspondent Scheme (Bank Saathi Yojana) renamed as Swabhimaan scheme Post Offices Bank scheme Micro Finance Institutions Pension Schemes Micro Insurance Schemes Developmental Schemes like MNREGA

Why Should MFI charge high interest? Risk in lending to weaker sections is high  Cost of raising funds for MFI is high  Cost of operations is also high 

New Pension Scheme (NPS) Initiated on January 1st, 2004 for Central Govt Employees NPS is based on defined contribution rather than defined benefit. Contribution: Tier 1 and Tier 2 Tier 1: Employee contributes 10% of basic and DA Govt also contributes 10% of basic and DA Tier 2: This is optional and the employee can contribute any amount Govt will not make any contribution The money so collected will be invested in securities market   

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Micro Insurance Schemes 

Aam Admi Bima Yojana  Initiated in 2007  It is a life insurance scheme

Rashtriya Swasthya Bima Yojana  Launched in 2007  It is a general insurance scheme (health insurance)

Inclusive growth Vs Financial Inclusion Inclusive growth is a much broader term. It means that the benefits of growth should percolate down to all.  Financial Inclusion means bringing all under the Financial services cloud which is required for inclusive growth. That is, in other words nobody is left behind in accessing Financial services.  Hence Inclusive growth includes within itself financial inclusion. 

DIRECT TAX CODE  Direct Tax code is a reform of direct tax system  Objectives of Direct Tax code are:o Simplification and consolidation of all direct tax laws of central o

government To make tax system more effective and efficient.

Simplification of direct tax laws:Tax laws would be re-written in simple language  Exemptions and reductions would be reduced  Cross references will be reduced  Explicit Language will be used. 

Consolidation of tax laws:All tax laws dealing with direct taxes would be merged.  E.g. Income Tax Acct, 1961; Wealth Tax Act, 1957; Gift Tax Act, 1958. 

Implementation of DTC o o o

Government published a discussion paper on DTC in 2009 Government issued DTC bill in parliament in 2010 Like all technical bills this bill too was referred to standing committee on finance headed by Mr Yashwant Sinha 85

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Government wanted to implement DTC from 1 Apr 2012 but due to delay in report being submitted by the standing committee it was not possible. o It is not a very controversial bill as state governments are not involved in it. o

DTC Proposals Increase in Income tax slabs. (Government adopted the proposed tax slabs in financial year 2012 – 2013) o Corporate Income Tax or Corporation Tax – For both domestic and foreign firms, tax rate should be 30% and no surcharge will be applicable. Currently there is 5% surcharge applicable on domestic firms and for foreign firms tax is 40% along with 2% surcharge is also applicable. o Minimum Alternate Tax rate should be 20%. Currently the tax rate of MAT is 18.5%. o Savings Scheme should be under EET. Presently these schemes are under EEE. o Few schemes like PF, Gratuity, pension funds etc would still come under EEE. GAAR – General Anti Avoidance Rule o

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o

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It is a provision in direct tax system It provided discretionary power to tax official to deny and tax benefit to any firm. Tax officials can violate certain provision of Income Tax Act and Double Taxation Avoidance Act Advantage – Will reduce tax avoidance; to check the misuse of DTAA; Impose restrictions on round- tripping. Disadvantages – It provides discretionary powers to tax officials; Corruption may increase; Uncertainty will increase; Credit worthiness will decrease. Guidelines issued by government in implementation of GAAR  It was postponed for 1 year  Approving panel should be established having 3 high ranking Income Tax officials  GAAR will be invoked only for large transactions. Parthasarathi Shome committee recommendations  GAAR should be postponed for 3 years i.e. 1st April 2016.  Whether GAAR has to be invoked or not should be decided by approving committee.

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   

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Threshold limit to be set as 3 crore. Capital gains tax should be abolished and advanced ruling should be allowed. Tax residency certificates by governments of other countries should be accepted The prime objective of GAAR should be to check misuse of tax and it should be invoked only in contravention cases. If Specific anti avoidance rules is present then GAAR should not be invoked. Shome panel also recommended that retrospective amendment should be made only in rarest of rare cases.

TAX REFORMS  In 1991 banking sector reforms were adopted and Narsimham

committee was set up. Also in the same year Tax reforms committee was set up under the chairmanship of Dr Raja J Chelliah.  Chelliah committee recommendations:o Tax rates in respect of all the taxes should be reduced. o Number of tax slabs should be reduced. o Service tax should be introduced (It was introduced in 1994) o Government should convert Modvat into full-fledged VAT. o Capital gains tax should be indexed to inflation o Wealth tax should be imposed only on non-productive wealth. o Specific taxes should be converted into ad valorem taxes.  2 task forces were set up in 2002 under the chairmanship of Dr Vijay Kelkar. Its recommendations were:o Income tax exemption limit should be decreased. o MAT should be abolished o Dividend distribution tax should be abolished for companies and shareholders o Long term capital gains tax on listed securities should be abolished o Service tax should be expanded in a comprehensive manner o Most of the excise should be replaced by Cenvat o Custom duty should be reduced to the rates prevailing in ASEAN countries. o State level VAT should be adopted in a uniform manner in all the states

PUBLIC FINANCE AND FISCAL ISSUES

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 Budget o

It is an annual financial statement of the estimated receipts and expenditure of the government during a financial year.

Budget is compulsory as per Article 112 o It is compulsory for even for states according to article 202 o Objectives: Transparency o

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Accountability

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To ensure advance planning

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Legislative control over executive

Types of Budget:

Zero based Budget (ZBB)

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This was given by Peter Pyhrr and was introduced in India in 1987

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No consideration is given to previous expenditure

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Government expenditure must be spent on most efficient programs

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Performance Budget or Performance and Program Budget

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Demand of grants should have Quantitative objectives, programs and criteria for assessment of performance

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Outcome Budget (reformed version of Performance Budget)

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Annual targets of each program are sub-divided into quarterly targets

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Appropriation Bill is passed in May

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Outcome Bill is presented by ministries after Appropriation Bill is passed in May.

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