Public Finance, Fiscal Policy and Fiscal Consolidation

Direct Taxes of the Union

1. Income Tax
2. Corporate Tax
3. Wealth Tax 
4. Securities Transaction Tax
5. Fringe Benefit Tax
6. Hotel Receipts Tax
7. Interest Tax (on Banks)
8. Gift Tax
9. Estate Duty
10. Banking Cash Transaction Tax

Direct Taxes of the States

1. Agricultural Income Tax
2. Professional Tax
3. Stamp Duty
4. Property Tax
5. Land Revenue

Indirect Taxes of the Union

1. Central sales Tax (given entirely to states)
2. Excise Duty
3. Customs Duty
4. Service Tax

Indirect Taxes of the States

1. Sales Tax (VAT system)
2. Excise Duty on liquor and narcotics
3. Toll Tax
4. Electricity Tax
5. etc

Budget should distinguish revenue expenditure from other expenditure. So,

i) Revenue Budget

ii) Capital Budget

Revenue Budget

Budget is just a financial statement having record of both receipts and expenditure. So here

Revenue Receipts

• Tax 
• Direct
• Indirect
• Non-tax
• Other incomes (from sale of goods and services)
• Interest received on Loans given
• Dividends & Profits
• Grants, aids received

Revenue Expenditure

• Salaries etc. (expenses in producing goods and services)
• Interest paid on loans
• Grants given
• Subsidies
• etc.

Revenue Deficit = Revenue Expenditure - Revenue Receipt

Effective Revenue Deficit = Revenue Deficit - grants given to states/ UTs for generating capital assets

Capital Budget

Revenue part

• Debt 
• Internal
• External
• Non-debt
• from Disinvestment
• loan (principal) recovered

Expenditure Part

• on capital goods/ assets
• loan (principal) given to states

SC, HC and Subordinate courts

Unlike American system, we have an integrated judicial system. We do not have judicial powers divided between center and states.
SC was inaugurated on 28th Jan, 1950. It succeeded Federal Court of India which was established in 1937.

System adopted from 1935 act.

Supreme Court 

Organisation

1 Chief
30 other judges

Originally, strength was fixed at 1+7 judges. Parliament has increased this by amendment.

Appointment

Prez does the job.
Senior-most SC judge is appointed as CJI (a per SC ruling in second judges case of 1993)
Other judges are appointed after consulting Chief. (Chief has to give his views after consulting a collegium of 4 senior-most judges)

Qualification of Judges

1. Indian citizen
2. should have been 
1. judge for HC(s) for 5 year OR
2. advocate of HC(s) for 10 years OR
3. a distinguished jurist in the opinion of Prez

Oath or Affirmation

by President or some person appointed by him.

Tenure of Judges

Constitution has fixed upper limit at 65 years. Any question regarding age is to be determined by such authority and manner as provided by the Parliament.

A judge can resign by addressing the letter to President.

Removal of Judges

Judges Enquiry Act (1968) has regulated the procedure by the process of impeachment

1. A removal motion signed by at least 100 members in LS or 50 members in RS is to be given to the speaker/ chairman
2. The speaker/ chairman may admit the motion or refuse to admit.
3. If admitted, the speaker/chairman must constitute a 3 member committee to investigate the charges
4. the 3 members need to be
1. Chief or a judge of SC
2. Chief justice of a HC
3. a distinguished jurist
5. If the committee finds that the judge is guilty of a) misbehaviour or b) incapacity, the house can take the motion for consideration
6. After the motion is passed by each house by Special Majority, and address will be presented to the President (the address must be presented in the same session and it doesn't lapse with dissolution of LS)
7. Finally, Prez passes an order and the judge stands removed.

Salary, Allowances, privileges, leave and pension are determined by Parliament and can not be varied to their disadvantage after appointment except in times of Financial emergency.

Pension is 50% of last drawn salary.

Ad-hoc Judge

Retired Judges
At any time, chief can request any retired judge of either SC or HC to act as a judge for temporary period.
previous consent of Prez and the said judge is necessary.
Prez determines allowances.

Constitution has declared Delhi as seat of SC, but it has authorized CJI to appoint other place or places as seat of SC (only with approval of the Prez). It is an optional provision.

With approval of President, SC can make rules governing procedure of the court.
at least 5 member benches for art. 143 references.
at least 3 member benches for other cases.

Independence of the court

• Appointment Procedure
• Removal Procedure
• Fixed service conditions
• Charged on consolidate fund of India
• conduct of judges cannot be discussed in legislatures
• Ban on practice after retirement
• Freedom to appoint own staff
• Power to punish for its contempt
• Jurisdiction cannot be curtailed (but can be widened by parliament)
• Separation from Executive

Jurisdiction and Power

• Original (and Exclusive)
• only a dispute involving a legal matter (not political or anything else) can be taken up under this
• no case involving any individual under this jurisdiction
• Exclusions
• Pre-constitutional treaties, covenants etc.
• inter-governmental treaties, agreements etc.
• Inter-state river water dispute
• matters referred to Finance commission
• adjustment of certain expenses and pension
• disputes of commercial nature
• recovery of damages by a state against center
• Writ (only original, not exclusive)
• between citizen and government
• types of writs
• habeas corpus
• mandamus
• prohibition
• certiorary
• quo-warrento 
• Appellate
• on constitutional matters (HC certifies)
• civil matters
• criminal matters
• on special leave
• Advisory/ Consultative (from Canadian constitution)
• on a a question of law or fact of public importance
• not obligatory on SC to give opinion
• on any dispute arising out of pre-constitutional treaty etc
• obligatory on SC
• A court of record
• Power of Judicial Review
• Other Powers
• election of Prez, VP
• conducts and behaviour of UPSC members
• power to review own judgement
• ultimate interpreter of the constitution
• power of judicial superintendence and control

3 categories of advocates in SC

1. Senior advocate
2. Advocate-on-record
3. Other advocates

High Court

Organisation
Constitution has left it on the discretion of the President who fixes it from time to time depending on its workload.

Appointment
Prez does the job.
Chief of HC is appointed after consulting CJI and the governor of the concerned state.
Other judges are appointed after consulting CJI and the governor of the concerned state. and chief of HC . (Chief has to give his views after consulting a collegium of 2 very senior judges)

Qualification of Judges

1. Indian citizen
2. should have been 
1. should have held judicial office for 10 years OR
2. advocate of HC(s) for 10 years OR
3. a distinguished jurist in the opinion of Prez

Oath or Affirmation

by Governor or some person appointed by him.

Tenure of Judges

Constitution has fixed upper limit at 62 years. Any question regarding age is to be determined by such authority and manner as provided by the Parliament.

A judge can resign by addressing the letter to President.

Removal of Judges

Judges Enquiry Act (1968) has regulated the procedure by the process of impeachment

1. A removal motion signed by at least 100 members in LS or 50 members in RS is to be given to the speaker/ chairman
2. The speaker/ chairman may admit the motion or refuse to admit.
3. If admitted, the speaker/chairman must constitute a 3 member committee to investigate the charges
4. the 3 members need to be
1. Chief or a judge of SC
2. Chief justice of a HC
3. a distinguished jurist
5. If the committee finds that the judge is guilty of a) misbehaviour or b) incapacity, the house can take the motion for consideration
6. After the motion is passed by each house by Special Majority, and address will be presented to the President (the address must be presented in the same session and it doesn't lapse with dissolution of LS)
7. Finally, Prez passes an order and the judge stands removed.

Salary, Allowances, privileges, leave and pension are determined by Parliament and can not be varied to their disadvantage after appointment except in times of Financial emergency.

Pension is 50% of last drawn salary.

Additional Judges
Prez appoints under 2 circumstances for for a temporary period not exceeding 2 years

Acting Judges
Prez appoints

Retired Judges
At any time, chief can request any retired judge of either SC or HC to act as a judge for temporary period.
previous consent of Prez and the said judge is necessary.
Prez determines allowances.

Independence of the court

• Appointment Procedure
• Removal Procedure
• Fixed service conditions
• Charged on consolidate fund of India except that of pension (which is charged on consolidated fund of the state)
• conduct of judges cannot be discussed in legislatures
• Ban on practice after retirement (except in SC or other HCs)
• Freedom to appoint own staff
• Power to punish for its contempt
• Jurisdiction cannot be curtailed (but can be widened by parliament or state legislature)
• Separation from Executive

Jurisdiction and Power

• Original (and Exclusive)
• Writ (only original, not exclusive)
• wider than that of SC
• between citizen and government
• types of writs
• habeas corpus
• mandamus
• prohibition
• certiorary
• quo-warrento 
• Appellate
• on constitutional matters (HC certifies)
• civil matters
• criminal matters
• on special leave
• Supervisory
• Control over subordinate courts
• A court of record
• Power of Judicial Review

PM, CM and Ministers

PM/ CM are the real head of the executive at union/ state level.

Prime Minister

Appointment

Constitution says (art. 75) : PM shall be appointed by Prez
Parliamentary Convention : Prez appoints leader of majority party in LS. (because that party has to prove majority on the floor of the house as per the collective responsibility (art. 75))

The person thus appointed must be a member of LS or RS. (If not a member already, must get elected within 6 months) [in 1997, SC held the same]

Oath By Prez

Powers and Functions

• wrt council of ministers
• wrt President
• wrt Parlament
• other powers

Union Council of Ministers

Art 74 and 75

Cabinet Committees
provided by rules of business (not by the constitution)
types

• standing
• ad-hoc

more imp. committees are

• CCEA
• Political Affairs committee 
• Parliamentary Affairs Committee (headed by HM)

Chief Minister

Constitution says (art. 164) : PM shall be appointed by Prez
Parliamentary Convention : Prez appoints leader of majority party in LS. (because that party has to prove majority on the floor of the house as per the collective responsibility (art. 75))

The person thus appointed must be a member of LS or RS. (If not a member already, must get elected within 6 months) [in 1997, SC held the same]

Oath By Governor

Powers and Functions

• wrt council of ministers
• wrt President
• wrt Parlament
• other powers

State Council of Ministers

Art 163 and 164

Cabinet Committees
provided by rules of business (not by the constitution)
types

• standing
• ad-hoc

Prez, VP and Guv

Executive is one main organ of modern democratic state responsible for putting the law into practice (i.e. to implement the laws).

Ours is a federal structure. So, all the powers are divided between center and state.

So, there is Union executive and state executive.

Union Executive = Prez + VP + PM +ministers + Attorney General

President

It is a Constitutional Post/ Office and there needs to be election for this post.
Election will be conducted by EC and all the election disputes will be resolved by SC.

An electoral college elects Prez. That electoral College consists of

• Elected members of both LS and RS
• Elected members of state assemblies
• Elected members of assembly of Delhi and Puducherry

Election is by the system of proportional representation by means of single transferrable vote and voting is by secret ballot.

Qualification needed to be eligible for election as Prez 

• must be Indian citizen
• must be of 35 years of age
• should be qualified as member of LS
• should not hold any other office of profit under union gov, state gov., local authority or any other public authority. sitting Prez, VP, Guv and ministers are exempted

Oath or Affirmation

when : after getting elected and before entering into the office

by whom : CJI or the in his absence, the senior-most judge of SC available

Conditions of office

Prez is bound by these conditions as long as he holds the office

• should not be member of legislatures
• no OOP
• Rashtrapati Bhavan
• emoluments, allowances and privileges as determined by the parliament.
• emoluments and allowances can not be diminished during his term in office.

Privileges & Immunities

• Personal immunity from legal liability for official acts
• immune from any criminal proceedings during his term in office
• cannot be arrested or imprisoned
• 2 months notice for initiating civil proceedings

Term
5 years from the day he/she enters office.
can hold more than this until his successor assumes charge

Vacancy in the office

1. On expiry of term
2. By addressing resignation letter to VP
3. Impeachment
4. Death
5. when he becomes disqualified or his election is declared void

If the vacancy is caused by resignation, death, removal or otherwise, the election should be held within 6 months.

Impeachment

A quasi-judicial procedure

One Ground for initiating impeachment charges : Violation of the Constitution

Steps

• One house initiates the charges after getting it signed by at least 1/4th of the members of that house
• a 14 days notice should be given to the President
• after it is passed by special majority, it is sent to the other house
• The 2nd house investigates the charges and if sustains by special majority, then the Prez stands removed from the day the bill is passed

Power & Functions
Executive Powers

1. All executive action is formally taken in his name
2. can make rules on how orders and other instruments be made and authenticated
3. can make rules for convenient transaction of business
4. appoints PM and other ministers
5. appoints AG, CAG, CEC, UPSC, FC etc.
6. can seek any info from PM (basically art. 78)
7. appoints diff. SC/ST commissions
8. can appoint an inter-state council
9. administers UTs through administrators
10. Scheduled are and Tribal area

Legislative Powers

1. integral part of Pariament as every bill requires assent to be an act
2. can summon or prorogue the Parliament
3. can dissolve the LS
4. addresses the first session
5. can send messages
6. can appoint any member to preside over in case of vacancy
7. nominates members
8. ordinance making
9. assent to bills
10. decides on the disqualification of members in consultation with the EC
11. lays various reports
12. can make regulations for UTs

Financial Powers

1. causes the budget to be presented
2. prior recommendations for money bill
3. Finance Commission
4. advances out of Contingency fund of India
5. no demand for grant can be made w/o his recommendation

Judicial Powers

1. appoints judges
2. consults CJI on a question of law or fact
3. pardoning power

Military Powers
Diplomatic Powers
Emergency Powers

Vice-President (VP)

Constitutional office/ post and needs an election to fill it. EC conducts and disputes are referred to SC

Electoral College consists of 

• Elected + Nominated Members of LS
• Elected + Nominated Members of RS

Election is by the system of proportional representation by means of single transferrable vote and voting is by secret ballot.

Qualification needed to be eligible for election as VP 

• must be Indian citizen
• must be of 35 years of age
• should be qualified as member of RS
• should not hold any other office of profit under union gov, state gov., local authority or any other public authority. sitting Prez, VP, Guv and ministers are exempted

Oath or Affirmation

when : after getting elected and before entering into the office

by whom : President or some person appointed by him

Conditions of office

VP is bound by these conditions as long as he holds the office

• should not be member of legislatures
• no OOP
• Rashtrapati Bhavan
• emoluments, allowances and privileges as determined by the parliament.
• emoluments and allowances can not be diminished during his term in office.

Term
5 years from the day he/she enters office.
can hold more than this until his successor assumes charge

Vacancy in the office

1. On expiry of term
2. By addressing resignation letter to President
3. Removal (No formal Impeachment)
4. Death
5. when he becomes disqualified or his election is declared void

If the vacancy is caused by resignation, death, removal or otherwise, the election should be held ASAP.

Governor

Though an independent constitutional post (as held by SC in 1979), appointment is made by the President by warrant under his hand and seal.

Qualification needed to be eligible for appointed as Governer

• must be an Indian citizen
• must be of at least 35 years of age
• should be qualified as member of LS
• should not hold any other office of profit under union gov, state gov., local authority or any other public authority. sitting Prez, VP, Guv and ministers are exempted

2 additional conventions

• to be from a different state
• to consult CM

Oath or Affirmation

when : after getting elected and before entering into the office

by whom : CJ of the HC or the in his absence, the senior-most judge of that HC available

Conditions of office

Governor is bound by these conditions as long as he holds the office

• should not be member of legislatures
• no OOP
• Raj Bhavan
• emoluments, allowances and privileges as determined by the parliament.
• emoluments and allowances can not be diminished during his term in office.

Term
5 years from the day he/she enters office.
can hold more than this until his successor assumes charge
can resign addressing the letter to President.
SC held that Pleasure of President is not justifiable.

Power & Functions

Power & Functions
Executive Powers

1. All executive action is formally taken in his name
2. can make rules on how orders and other instruments be made and authenticated
3. can make rules for convenient transaction of business
4. appoints PM and other ministers
5. appoints AG, CAG, CEC, UPSC, FC etc.
6. can seek any info from PM (basically art. 78)
7. appoints diff. SC/ST commissions
8. can appoint an inter-state council
9. administers UTs through administrators
10. Scheduled are and Tribal area

Legislative Powers

1. integral part of Pariament as every bill requires assent to be an act
2. can summon or prorogue the Parliament
3. can dissolve the LS
4. addresses the first session
5. can send messages
6. can appoint any member to preside over in case of vacancy
7. nominates members
8. ordinance making
9. assent to bills
10. decides on the disqualification of members in consultation with the EC
11. lays various reports
12. can make regulations for UTs

Financial Powers

1. causes the budget to be presented
2. prior recommendations for money bill
3. Finance Commission
4. advances out of Contingency fund of India
5. no demand for grant can be made w/o his recommendation

Judicial Powers

1. appoints judges
2. consults CJI on a question of law or fact
3. pardoning power

Military Powers
Diplomatic Powers
Emergency Powers

Foreign Trade

Almost all the economies are open, interacting with each other. There will be exchange of 
i) Products (goods and services)
ii) Financial Assets
iii) Factors of production

The total foreign trade (export+import) as a proportion of GDP is the measure of degree of openness of an economy. In 2006-07, the share of foreign trade to the GDP was 35% (in case of India)

Balance of Payment (BoP)

It is a record of transactions in goods, services and assets between a country with external world.
Transactions are recorded under two accounts
i) Current Account
ii) Capital Account
iii) Errors and Omissions

(As per IMF definition, it includes Financial Account as well)

Current Account

3 items get listed here
i)Imports
ii) Exports
iii) Transfer Payment

Trade Balance = Diff. of Import of Goods and Export of Goods

Invisible Trade

These are trade in Services and includes
i) Non-factor Services
ii) Incomes (factor and non-factor income + interest, profits, dividend on our assets abroad - of foreign assets in India
iii) Transfer Payments (remittances, Gifts,Grants)[can be both official & private]

Capital Account

all purchases and sales of assets such as money, stock, bonds are listed here.

• FDI
• FII
• direct purchase of assets etc
• External Commercial Borrowings (ECBs)
• External Assistance

BoP deficit is financed through foreign exchange reserve.
India's Foreign exchange reserve is maintained by RBI and consists of 
i) Foreign currencies 
ii) Gold
iii) SDR at IMF

As of 

Foreign Exchange(Forex) Market

A market where national currencies are traded.
Price of one currency in terms of another is exchange rate.
Methods of calculating exchange rate
i) Fixed or Bretton Woods system
 Why did this system broke down? Ans. Speculative Attack
US adopted Floating rate system in 1971. After that most other countries followed suit.
ii) Flexible/Floating Exchange rate
iii) Managed Floating Rate System

Bilateral nominal exchange rate
Bilateral real exchange rate
Multilateral exchange rate such as NEER or REER


If the real exchange rate is 1, then the countries are said to at purchasing power parity
If the real exchange rate is greater than 1, then products at home country have become expensive.
So, real exchange rate is ofter regarded as a measure of country's International Competitiveness

RBI calculates both NEER and REER (REER-6 and REER-36)

Indus Valley Civilization

Salient Features

Town Planning

• grid system
• citadel 
• large scale use of burnt bricks and absence of stone in construction
• underground drainage system connecting every house to the street drains
• Great bath at Mohenjodaro
• steps on either side
• rooms for changing clothes
• inlet was from a large well in the adjacent room
• outlet was to the drai
• One large granary at Mohenjodaro
• as many as 6 granaries in the citadel area of Harappa

Economic Life

Social Life

Religious Life

Pre-Historical Era - Before Indus Valley Civilization

Generally divided into

1) Pre-history (for which no written records available)
2) History (both written and archeological evidences are available)

Pre-history on Indian landmass

1) Paleolithic (Old Stone Age)
2) Mesolithic (Middle Stone Age)
3) Neolithic (New Stone Age)
4) Chalcolithic (Copper Age)
5) Iron Age

Methods used to determine the time period
1) carbon dating
2) dendro-chronology

Paleolithic Age (till 10000 BC)

• scattered all over but mostly found near water sources
• lived rarely in huts made of leaves
• hunters-gatherers
• found at 
• Bhimbetka
• Siwaliks
• Potwar Plateau & Soan Valley
• Adamgarh hills in Narmada valley
• Kurnool
• near chennai

Mesolithic Age (10000 BC - 6000 BC)

• microliths
• shift from big animal hunting to small animal and fish
• use of bow and arrow
• tendency to settle at a place for longer duration of time
• domestication of animals stated
• horticulture and primitive agriculture also started

Neolithic Age (6000 BC - 4000 BC)

• Practice of Agriculture
• Domestication of Animals
• Polished stone tools
• Pottery using wheels
• Mud brick houses instead of grass huts
• clothes made of cotton and wool

Chalcolithic Age

• copper and bronze along with stone
• Generally grew up in river valleys
• People travelled far away to obtain metal ores leading to network of settlements

Bhakti Movement

Sufi Movement

Reform movement which originated in Persia and became popular in India after 12the century.

• Practised Asceticism and Mysticism
• were against materialism of the caliphate
• preached that God could be reached only through love, devotion and meditation
• regarded Prophet Mohammad as a perfect human being
• opposed rituals
• tolerant to other religions
• organized themselves into 12 orders called Silsilas (which signify a continuous link between master and disciple)
• Chisti Silsila is the most imp. in India

Khwaja Moin-ud-din Chisti (1192-1235)

• Ajmer
• greatest form of devotion to God is to serve humanity
• popularly known as Garib Nawaz
• encouraged singing devotional songs and qawaalis at gatherings

Baba Farid

• disciple of Chisti
• preached unity of God and brotherhood
• encouraged people to lead a simple life
• composed many verses in Punjabi
• Balban was a follower 

Nizam-ud-din Auliya

• Delhi
• disciple of Baba Farid
• against class and caste distinctions
• popularly known as Mehboob-i-ilahi

Saint Angore Andavar

• 16th century
• popularly known as Meeran sahib or Qadirwali
• Kandhuri urs festival
• 
  

Indian Railways

Made a humber beginning in 1854 when 34 km track from Mumbai (then Bombay) to Thane was commissioned.

Kakodkar Committee on Railway safety

Chairman :Anil Kakodkar (Former Chairman, AEC)

Advisor to the committee : E. Sreedharan

Submitted report in 2013

Recommendations : total 106 recommendations which require 1 lakh crore in next 5 years

Current status : Railway Board is examining the feasibility of the recommendations in order to get implemented.

Irrigation

What is irrigation?
It is the system of artificially supplying water to the crops.

Why needed?

• The very nature of monsoon rainfall
• uncertain (hardly keeps its date of arrival and departure)
• variable (more variable in less rainfall areas)
• unevenly distributed over time and space
• monsoon gaps/ breaks
• torrential
• HYV seeds need more water
• some crops need more water
• for food security, more yield, more crops per year

What is 3 types of Irrigation Projects in India on the basis of Cultivable Command Area

• Major 
• Medium
• Minor

Different Irrigation Techniques (on how water is obtained and distributed)

• Surface (sometimes known as Flood Irrigation)
• Furrow
• Basin
• Border Strip
• Localized
• Drip
• Sprinkler/ Overhead
• Seepage/ Sub-irrigation

Vital Stats

• Net area under irrigation is 64 mha.
• Composition is as follows (2009-10 data)
• Canal (26%)
• Tank (3%)
• Wells and Tube wells (62%)
• Other means (9%)

Irrigation Systems in India

Tank

Well & Tube well

Canal

Broadly classified into i)Inundation canals and ii)Perennial canals.

Agriculture

A very important activity.

Along with allied sectors (Fisheries, Dairy), it constitutes the primary sector of our economy.

contributes 13% of India's GDP

employs around 58% of total population. So, there is lot of disguised unemployment, which needs to be moved to other sectors.

Issues plaguing Indian agriculture

Institutional Bottlenecks

1. Lack of proper credit facilities

The farmer needs monetary help but only gets back the returns at th

Also, village money lenders

So, RRBs were set up

Technological Backwardness


Steps taken

Institutional Reforms

Technological Inputs

Irrigation - is the process of providing water to crops by artificial means

Why irrigation assumes significance in Indian scenario?

Characteristics of Monsoon rainfall

• Unpredictable - hardly keeps its date
• Variable
• unevenly distributed over time and space

Our economy being much dependent over agriculture, we cannot ignore

land scarcity, to increase yield, irrigation needed

for HYV seeds

Agricultural Biosecurity - EU Ban on Alphonso

Background

2014 : EU banned import of Alphonso mango and four vegetables from India citing reasons of

• presence of harmful pests 
• lack of certification before export

Agricultural Biosecurity Bill, 2013

Provisions

• set up Agricultural Biosecurity Authority of India (ABAI)
• ABAI will be responsible for
• 
  

Approach - Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

Outline

A brief background/ history about the grouping/ agreement

How they work?

Why they are formed?

Importance to India

Potential they hold

Recent Summits & important outcomes concerning India

Previous Questions

The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate. (10 marks)

External Sector

It is that sector of an economy which deals with economic activities with the external world. includes export, import, FDI etc.



All of India's transactions with external world fall into either current account or capital account.

Current Account

All the short term transactions are recorded here.

• Import & export (difference is the trade balance)
• Interest from loans
• foreign investment in shares (Portfolio investments)

Maintained by the central bank (RBI) on behalf of the govt.

India had current account surplus only during 2000-2003.

Trade Deficit

It is the monetary value difference between import and export of goods.

Capital Account

All the long term transactions are recorded here.

• FDI
• Long term loans
• issuance of external bonds
• private remittance

There is no deficit or surplus calculation here like the current account.

Convertibility

It is the ability of domestic currency to convert into foreign currency with ease.

India currently allows full convertibility in Current account (after 1991 liberalization) but partial convertibility on Capital Account

Raghuram Rajan says full convertibility will happen in few years, but India requires some curb as of now. 

In May-August 2013, capital control helped the country when fed tapering saw as many as over USD 20 billion being pulled out of the country by foreign investors. It even helped in averting any situation akin to currency meltdown of Asian economies that happened in 1997-98

some more

Banks

Banks

1. Commercial Banks
• deals mainly with general public
• SBI, ICICI etc.
• RBI is the regulator
2. Industrial Development Banks
• target group is industries
• provides medium/ long term finance
• IDBI, IFCI, IIBI
• also NABARD, SIDBI,NHB
3. RRBs (NABARD is the regulator)
4. Cooperative Banks
• SCBs
• District level or Urban based
• PACs

Rural Banking

Players

• Commercial Banks
• RRBs
• Cooperatives
• MFIs etc.

Initiatives

• Bank nationalization
• Priority Sector Lending
• RIDF (operated by NABARD)
• RRBs on the recommendations of Narasimhan committee
• Amalgamation of RRBs
• Kisan Credit Card (KCC)
• SHG-Bank Linkage
• Banking Correspondent (BC)
• 2006 : Interest Subvention scheme
• Swabhimaan scheme

Financial Inclusion

Initiatives

• 1969 : Lead Banking Scheme
• 2005 : Basic savings account
• 2011 : Swabhimaan (target extended in 2012 budget speech)
• 2006 : BC
• Ultra Small Branches (USBs)
• Kiosk Banking is being mooted

Issues/ challenges

• NPA
• Capital/ Fund shortage- cannot raise fund from capital market
• Rural banking

http://www.thehindu.com/opinion/columns/C_R_L__Narasimhan/the-elusive-quest-for-autonomy/article6996234.ece

Security Market

Insurance Sector

It is a kind of 'risk spreading'. and solves two purpose

• a safety/security for the individual
• acts as financial intermediary

Insurance policies are purchased at fixed premiums.

Life Insurance

Non-life general Insurance (health, micro insurance etc.)

Reinsurance

Specialized Insurance

Insurance Penetration = Premium underwritten/GDP (2.3% in 2000 to 4%)

Insurance Density = Premium underwritten/Total population

Development of Insurance Industry in India
1956 : Life insurance sector was nationalized and LIC was set up. LIC had been the biggest investor for public sector (Govt and PSUs, recently even for Railways)
1971 : General insurance sector was nationalized. GIC started operation with 4 holding companies.
1993 : Insurance Reforms Committee under ex-RBI Governor RN Malhotra
1994 : Malhotra committee recommendations

• Decontrolling of the sector -> IRDA act, 1999
• restructuring of GIC -> in 2000
• restructuring Tariff Authority Committee
• setting up a regulatory authority -> IRDA in 2000

1999 : Year of Insurance reforms
2000 : GIC was reconstituted as the sole reinsurer
2002 : GIC is no longer the holding company for the four. They are directly owned by GoI.

Challenges ahead for the sector

Major issues plaguing the sector

Govt. Policy initiatives

Bancassurance
Banks as agents to sell insurance policies
3 business models are here
2000 : this model came into existence in India after GoI and RBI permitted

The Insurance Bill

Finally passed in Mar 2015, while the initial bill was introduced in 2008

Salient Features

• FDI cap to increase from 26% to 49%
• IRDA to have more powers
• to levy higher penalty on violation of laws 
• impose a ceiling on expense management 
• fix remuneration for agents (commission)
• A policy can be called to question within 3 years on misstatement of facts
• no rejection of claims after 3 years
• ambit of health insurance got increased
• foreign insurers cannot issue policy in India without prior IRDA permission, even in SEZs

Benefits

1. more coverage / distribution points
2. simpler products
3. more transparency in features
4. less dependance on agents
5. 26% to 49%
1. more variety in products
2. more professionalism
6. flexibility in paying premiums through installments
7. faster claim settlement
8. bring credibility to the sector globally
9. simplification of norms for expansion of reinsurance sector
10. issues
1. in cases of M&A, bill proposes to curb regulator's power

http://www.livemint.com/Home-Page/thCYUdcyPVbDUPU3cDSbCJ/Theres-more-to-the-insurance-Bill-than-just-hike-in-FDI.html?utm_source=copy

http://www.business-standard.com/article/pf/7-benefits-if-insurance-bill-is-passed-114102600673_1.html

http://mrunal.org/2014/01/banking-bancassurance-compulsory-broker-model-irda-vs-banks-issue-benefits-challanges-insurance-penetration-financial-inclusion-nachiket-committee.html

Further Reading
1. Ramesh Singh

2. NIOS Material
3. Hindu Article

Financial Intermediaries & Financial Market

Who are they?

Channelize surplus money (savings) from Investors (individual households & companies) and producers.

And, the place where this exchange of surplus money takes place is the Financial Market.

2 separate segments

1. Money Market (caters to short-term (upto 364 days) fund requirements)
2. Capital Market (caters to long term fund requirements) 

Money Market in India

Organized

8 instruments are available here to cater to different needs

• Treasury Bills
• CDs
• Commercial Bills
• Commercial Papers
• Mutual Funds
• Repo and reverse repo
• Cash Management Bill

Players

• Government
• Corporates
• Banks
• Individuals etc.

Unorganized

• Local money lenders
• Indigenous Bankers
• Small/ Big Businessmen 

Capital Market in India

Players

1. Banks
2. Financial Institutions
1. AIFIs
1. SIDBI
2. NHB
3. EXIM Bank
4. NABARD
2. SFIs
1. RCTC
2. TFCL
3. Investment Institutions (now not in vogue)
1. GIC
2. LIC
3. UTI
4. SLFIs
1. SFCs
2. SIDCs
3. NBFCs
4. Security Market players
1. Mutual Fund Companies
2. Insurance Companies 
3. Pension and Provident Funds

Inflation and how to check it

Inflation is caused by mismatch in the money supply in the economy.
Money supply is determined by

RBI manages money supply through its Monetary Policy Framework

http://www.thehindubusinessline.com/economy/govt-announces-details-of-new-insurance-pension-schemes/article6950744.ece


RBI can follow tight monetary policy to control the money supply in the economy by

• Raising LAF or repo rate (now 7.75%)
• raising CRR (now 4%)
• raising SLR (now 23%)
• raising Bank rate
• Open Market Operations
• Qualitative measures

By Govt through fiscal Policy

http://www.thehindu.com/business/Economy/india-overhauls-monetary-policy-using-inflation-targets/article6951461.ece

Inflation - An overview

Inflation 

A general price rise sustained over a period of time.

http://www.thehindu.com/business/ready-reckoner-what-isdeflation-and-is-it-bad/article7692832.ece

Type of Inflation	Cause
Inflation	Price Rise
Deflation	Fall in general level of prices
Stagflation
Reflation

Causes of Inflation

Demand-Pull

depends on the money supply (available money ) in the system. This can be measured as below -

• Keynesian school (favours lowering demand)
• goods in short supply are imported or not exported
• wage revision
• interest on loans are raised
• Monetarism school
• monetary policy tool for proper money supply

Cost-Push

• Keynesian School
• reducing excise duties on raw materials
• wage revision
• Monetarism school
• monetary policy tool for proper money supply

monetary policy tools does not work if price rise is taking place in items of everyday use.

monetary policy tools are used by RBI where other (fiscal) measures are used by govt. (Box 4.2 of economic survey 2012-13)

Inflation Types

1. Low
2. Galloping
3. Hyperinflation

Other Terms/Concepts
Reflation
Stagflation


Measuring Inflation

1. By price indices such as WPI or CPI
2. By help of GDP deflator method

Effects of Inflation

1. Redistributes wealth from creditors to debtors
2. Lending institutions suffer
3. shows a rise in demand
4. Investment is boosted in the short run because
1. higher inflation suggests higher demand
2. cost of loan is lowered
5. shoe leather cost of inflation
6. on tax
7. on ex
8. export segment benefits by volume
9. imports become costlier
10. on trade balance
11. increases employment in the short run (Philips curve)
12. increases nominal value of wages while real value falls (dearness allowance)

Comfort Zone of Inflation - Inflation Targeting as part of monetary policy

Further Reading

1. Mrunal article

2. Ramesh Singh

Economy Basics

All of us want to earn our income in order to spend and save (thereby increasing our economic wealth and well being). Income earning, spending and saving are called Economic Activities. These activities are interrelated and interdependent.
For income generation, goods and services are produced (Production process) from resources. Mere possession of resources does not entail income or wealth. So in production process or flow of production, human resources gets combined with natural and manmade environment with certain social and technological structure.
Part of the income is spent on these products by consumers (Consumption) and rest goes to savings (investment).

Economics is the discipline that studies the economic activities of mankind.
&
Economy is the system where these activities take place.

Economy provides - 

• Goods
• Intermediate Goods   [by the economic nature of its use]
• Finished/ Final Goods  [by the economic nature of its use]
• Producer (or Capital) goods [constitutes the total investment]
• Consumer goods
• Single use
• durable
• Services 
• Producer
• Single use
• Consumer
• Single use

Vital Processes or Activities of Economy

Production

Consumption

Investment through Savings

Stock investment
Fixed investment

The part of final goods that are capital goods constitute Gross Investment of an economy.

Net Investment = Gross Investment - Depreciation

Saving = Income - Consumption Expenditure

Savings are routed to investment via Financial Intermediaries.

Sectors of Economy

Economic Activities are broadly classified into different categories which are known as sectors of economy.

Primary Sector - comprises all those economic activities that use various natural resources. 

Secondary Sector - comprises all those economic activities that uses output of primary sector as raw materials.

Tertiary Sector - It is like a horizontal providing services to all the above sectors.

Types of Economy 

Classification is based on i) relative contribution of particular sector in total production and ii)ration of dependent population on the sector.

Agrarian Economy

Industrial Economy

Service Economy

constitute different stages in the growth of an economy.

National Income

Three methods to measure this.

i)   Income method

ii)   Expenditure method

iii)  Product Method

GDP, NDP, GNP, NNP

GDP = Gross value of all the goods and services produced in the territory of a country (India) during a period of time (generally for a year)

NDP = GDP - Depreciation

GNP = GDP + Net Factor income from abroad 

Net Factor income from abroad = Factor income by domestic factors of production (Indian resources) employed abroad - 
Factor income by foreign factors of production employed in India

NNP = GNP - Depreciation

All these measures can be evaluated - 

i) at factor cost

ii) at market price (factor price/market price = factory price + ex-factory price)

NNPFC = NI = NNPMP - Indirect Taxes + Subsidies

NI = PI + UP + Corporate Tax + Net interest Payments - Net Transfers

PI = PDI + Tax payments + Non-tax payments

National Disposable Income = NNPMP + other current transfers from abroad

In India and in most developing economies, income is calculated at factor cost. why?

The price can be constant or current.

Again India (and most developing economies) calculate income at constant prices. why?

Income of a person or the country can be

• Nominal (measured at current prevailing prices)
• Real      (measured at constant prices) 
• Disposable

GDP Deflator = Nominal GDP/ Real GDP

GDP Deflator is a measure of change in prices. Other two being 

• WPI
• CPI
• for rural
• for urban
• for both

New Changes in the National Income Calculation

Jan 2015 : CSO changed 

• base year from 2004-05 to 2011-12
• methodology

Result : Revised GDP for FY2014-15 is 7.4%, up by 1.5% from 2013-14

Skepticism because

• new manufacturing GDP includes not only the value of production of a business unit, but also distribution (marketing and selling) costs. So, the share of corresponding services should have been reduced
• macroeconomic indicators do not show a significant positive change : The rate of Gross Fixed capital Formation (GFCF) has fallen over the year w.r.t GDP
• lack of clarity