Economy Questions

Ghanshyam Thori Economy Notes
Ghanshyam Thori Economy Notes 1

Economics
Analysis
WTO
Discuss the importance of World Trade Organization (WTO) to Indian economy in the light of various
opportunities & challenges at the global level. (30 Marks)
What is Dumping? Evaluate the remedial measures taken by the Government of India vis--vis WTO
provisions regarding dumping? (30 Marks)
Discuss the reasons for the failure of the Seattle Millenium talks on the WTO. Discuss some
implications of this failure on the Indian Economy. (15 Marks)
Various Industrial Sectors - Industrial Policy/Liberalization/Reforms/Disinvestment
What are the reasons for Industrial sickness in India? Suggest suitable remedies. (30 Marks)
State the comprehensive structural reforms undertaken to improve the Indian Economy since 1991. (30
Marks)
India is rapidly emerging as an information technology Superpower. Discuss some aspects of the
growth of this sector in the Indian economy. What role can public policy play in further enhancing the
growth prospects in this sector? (30 Marks)
Discuss the role of public sector during the post-reform period of Indian Economy. (15 Marks)
Liberalization of Indian Economy since 1991 has led to excessive consumerism & over production of
white goods. Elucidate. (15 Marks)
Outline the main objectives & achievements of the policy of disinvestment in India. (15 Marks)
Agriculture/Forestry/Environment
Comment on the relationship between credit availability & agricultural growth in India. (30 Marks)
What is the meaning & aim of social forestry? What are the main weaknesses noticed in Social Forestry
Program. (15 Marks)
Bring out the main objectives of Rashtriya Krishi Bima Yojana. The scheme is being implemented by
which agency. (15 Marks)
What are Minimum Support Prices in agricultural products? What are their objectives? (15 Marks)
Examine the effect of economic development on environmental degradation in India. (15 Marks)
Finance/Taxes/Monetary Matters/Financial Reforms
Describe the main sources of Industrial Finance in India. How could India benefit from recent
developments in international finance? (30 Marks)
What are the major recommendations of the Task Force on direct taxes appointed under the
chairmanship of Shri Vijay L Kelkar? (30 Marks)
Discuss the economic effects of black money (parallel economy) in Indian Economy. (15 Marks)
Discuss the nature & cause of UTI crisis with particular reference to US-64. How does this UTI fiasco
affect the investment climate in India?. (15 Marks)
What is the role of external financial assistance in the Indian Economy? (15 Marks)
What is a Finance Commission? (15 Marks)
What are the recommendations of the Narsimham committee regarding the banking sector in India. (15
Marks)
Point out the measures undertaken towards flexibility in capital account transactions during the recent
past. (15 Marks)
What are the hurdles faced by the Finance Ministers of India in keeping the fiscal deficit below 3-4
percent of the GDP? Suggest steps to lower fiscal deficit. (15 Marks)
Poverty
Discuss the causes & ramifications of hunger in Africa. (30 Marks)
How is poverty level measured? Evaluate poverty eradication programs in India. (30 Marks)
What is the incidence of poverty in India? How should poverty alleviation programs be constructed? (30
Marks)
Examine the effects of Globalization on poverty removal in India. (15 Marks)
Planning
Write a note on the strategy of planning in India since 1951. (30 Marks)
Outline the objectives of 10
th
Five Year Plan(15 Marks)
Main provisions of 9
th
five year plan (2 Marks)
Population
Outline the main targets fixed in the National Population Policy 2000. What have been the followup
measures to this policy? (30 Marks)
Control over growth of population in India is essential for the countrys rapid economic development.
Discuss. (30 Marks)
Economics Policies & Schemes Recent Current Affairs
The main thrust of Export-Import Policy 2002-07 is on creating a framework for enhancing Indias
export capability. In the light of this statement outline the salient features of EXIM Policy 2002-07.
(UPSC 2002) (30 Marks)
With what objectives was the Essential Commodities Act 1955 amended last year? (15 Marks)
Explain Mega Food Park Scheme of Government of India. (15 Marks)
What is (Revised) Targeted Public Distribution System? What are its main features? (15 Marks)
Transport:
What ails Indians road transport economy? Suggest measures for remedy. (15 Marks)
Miscellaneous:
Indian economy represents a paradox of high savings rate with low income & high savings rate with low
growth rate. Analyse. (30 Marks)
What are the implications of Gender disparities in India? (15 Marks)
Examine the functions of the European Free Trade Association. (15 Marks)
Economic Terms
Twin Deficit Twin deficit means combination of fiscal deficit & current account deficit. A
current account deficit shows the extent to which a country is consuming more than
it is producing. The current account is a section in a countrys balance of payments
(BOP) that records a country's current transactions. The account is divided into
four sections: goods, services, income (such as salaries and investment income)
and unilateral transfers (for example, workers remittances).
A current account deficit occurs when a country has an excess of one or more of
the four factors making up the account. When a current transaction enters the
account, it is recorded as a credit, and when a value leaves the account, it is marked
as a debit. Basically, a current account deficit occurs when more money is being
paid out than brought into a country.
Fiscal Deficit When a government's total expenditures exceed the revenue that it generates
(excluding money from borrowings). Deficit differs from debt, which is an
accumulation of yearly deficits. A fiscal deficit is regarded by some as a positive
economic event. For example, economist John Maynard Keynes believed that
deficits help countries climb out of economic recession. On the other hand, fiscal
conservatives feel that governments should avoid deficits in favor of a balanced
budget policy.
Phillips Curve An economic concept developed by A. W. Phillips stating that inflation and
unemployment have a stable and inverse relationship. The theory states that with
economic growth comes inflation, which in turn should lead to more jobs and less
unemployment. The concept has been proven empirically and some government
policies are directly influenced by it.
Indifference Curve A diagram depicting equal levels of utility (satisfaction) for a consumer faced with
various combinations of goods.
As an example, consider the diagram above. This consumer would be most
satisfied with any combination of products along curve U3. This consumer would
be indifferent between combination Qa1, Qb1, and Qa2, Qb2.
Hundi Hundis refer to financial instruments evolved on the Indian sub-continent used in
trade and credit transactions.Technically, a Hundi is an unconditional order in
writing made by a person directing another to pay a certain sum of money to a
person named in the order. Hundis, being a part of the informal system have no
legal status and are not covered under the Negotiable Instruments Act, 1881.
Though normally regarded as bills of exchange, they were more often used as
equivalents of cheques issued by indigenous bankers.
Badla Badla was an indigenous carry-forward system invented on the Bombay Stock
Exchange as a solution to the perpetual lack of liquidity in the secondary market.
Under Badla system the share transaction deal could be postponed from one
settlement period (generally a week) to next settlement period by paying finance
charges i.e. compensation or badla. Rolling settlement has replaced Badla System.
Laffer Curve Invented by Arthur Laffer, this curve shows the relationship between tax rates and
tax revenue collected by governments. The chart below shows the Laffer Curve:
The curve suggests that, as taxes increase from low levels, tax revenue collected by
the government also increases. It also shows that tax rates increasing after a certain
point (T*) would cause people not to work as hard or not at all, thereby reducing
tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then
all people would choose not to work because everything they earned would go to
the government. Governments would like to be at point T*, because it is the point
at which the government collects maximum amount of tax revenue while people
continue to work hard.
Eurobond Bond issued in a currency other than the currency of the country or market in
which it is issued. Usually, a eurobond is issued by an international syndicate and
categorized according to the currency in which it is denominated. A eurodollar
bond that is denominated in U.S. dollars and issued in Japan by an Australian
company would be an example of a eurobond. The Australian company in this
example could issue the eurodollar bond in any country other than the
U.S.Eurobonds are attractive financing tools as they give issuers the flexibility to
choose the country in which to offer their bond according to the country's
regulatory constraints. They may also denominate their eurobond in their preferred
currency. Eurobonds are attractive to investors as they have small par values and
high liquidity
ADR (American
Depository
Receipt)
A negotiable certificate issued by a U.S. bank representing a specified number of
shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are
denominated in U.S. dollars, with the underlying security held by a U.S. financial
institution overseas. ADRs help to reduce administration and duty costs that would
otherwise be levied on each transaction.
GDR A bank certificate issued in more than one country for shares in a foreign company.
The shares are held by a foreign branch of an international bank. The shares trade
as domestic shares, but are offered for sale globally through the various bank
branches.
Rolling Settlement The process of settling security trades on successive dates so that trades executed
today will have a settlement date one business day later than trades executed
yesterday. This contrasts with account settlement, in which all trades are settled
once in a set period of days, regardless of when the trade took place. When
securities are sold and settled on successive business days, they are said to be
experiencing a rolling settlement. E.g. T+2 rolling settlement in India.
Participatory
Notes
Financial instruments used by investors or hedge funds that are not registered with
the Securities and Exchange Board of India to invest in Indian securities. Indian-
based brokerages buy India-based securities and then issue participatory notes to
foreign investors. Any dividends or capital gains collected from the underlying
securities go back to the investors. In many ways, this is similar to an informal
ADR process, where brokerages hold on to stocks for foreign investors. However,
Indian regulators are not very happy about participatory notes because they have no
way to know who owns the underlying securities. Regulators fear that hedge funds
acting through participatory notes will cause economic volatility in India's
exchanges
Currency Swap A swap that involves the exchange of principal and interest in one currency for the
same in another currency. For example, suppose a U.S.-based company needs to
acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars.
These two companies could arrange to swap currencies by establishing an interest
rate, an agreed upon amount and a common maturity date for the exchange.
Currency swap maturities are negotiable for at least 10 years, making them a very
flexible method of foreign exchange.
Dalal Street A term that refers to the Bombay Stock Exchange, the major stock exchange in
India. The street is home not only the Bombay Stock Exchange but also a large
number of other financial institutions. The term "Dalal Street" is used in the same
way as "Wall Street" in the U.S., referring to the country's major stock exchanges
and overall financial system. These terms are often seen in the financial media.
Dow Jones
Industrial Average
The Dow Jones Industrial Average is a price-weighted average of 30 significant
stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was
invented by Charles Dow back in 1896. Often referred to as "the Dow", the DJIA is
the oldest and single most watched index in the world. The DJIA includes
companies like General Electric, Disney, Exxon and Microsoft. When the TV
networks say "the market is up today", they are generally referring to the Dow.
Nikkei Short for Japan's Nikkei 225 Stock Average, the leading and most-respected index
of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-
chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the
Dow Jones Industrial Average Index in the U.S. In fact, it was called the Nikkei
Dow Jones Stock Average from 1975 to 1985
S&P 500 An index consisting of 500 stocks chosen for market size, liquidity and industry
grouping, among other factors. The S&P 500 is designed to be a leading indicator
of U.S. equities and is meant to reflect the risk/return characteristics of the large-
cap universe. The S&P 500 is one of the most commonly used benchmarks for the
overall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one
time the most renowned index for U.S. stocks, but because the DJIA contains only
30 companies, most people agree that the S&P 500 is a better representation of the
U.S. market. In fact, many consider it to be the definition of the market.
DAX An index of 30 top German Stocks.
Hang Seng An index of the leading stocks on the Hong Kong stock market.
FTSE The FTSE is similar to Standard & Poor's in the United States. They are best
known for the FTSE 100, an index of blue-chip stocks on the London Stock
Exchange
NYSE Composite
Index
Measures all common stocks listed on the New York Stock Exchange and four
subgroup indexes: industrial, transportation, utility and finance. The index tracks
the change in the market value of NYSE common stocks, and is adjusted to
eliminate the effects of new listings and delistings. The market value of each stock
is calculated by multiplying its price per share by the number of shares listed.
NASDAQ National Association of Security Dealers Automated Quotation. This is an index of
New York Stock Exchange which determines the behaviour of IT & IT related
industries. Created in 1971, the Nasdaq was the world's first electronic stock
market. The term "Nasdaq" used to be capitalized "NASDAQ" as an acronym for
National Association of Securities Dealers Automated Quotation. In recent times,
the acronym was dropped, and Nasdaq is now used as a proper noun. The Nasdaq
is traditionally home to many high-tech stocks. The big ones include Microsoft,
Intel, Dell and Cisco.
S&P CNX Nifty or
Nifty
A stock index endorsed by Standard & Poor's and composed of 50 of the largest
and most liquid stocks found on the National Stock Exchange (NSE) of India. It is
commonly used to represent the market for benchmarking Indian investments.
Similar to other major stock indexes like the S&P 500, companies must meet
certain requirements in terms of market capitalization and liquidity before they can
be considered for inclusion in the index. Also known as "Nifty 50".
CNX stands for the Credit Rating Information Services of India Limited (CRISIL)
and the National Stock Exchange of India (NSE). These two bodies own and
manage the index within a joint venture called the India Index Services and
Products Ltd. (IISL). Without the additional abbreviation to S&P CNX, the index
name would be S&P CRISIL NSE Index. As of July 2007, the stocks in the S&P
CNX Nifty represented well over 50% of the total market capitalization of all
stocks in India's stock exchanges.
Sensex An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the
benchmark index of the Bombay Stock Exchange (BSE). It is composed of 30 of
the largest and most actively-traded stocks on the BSE. Initially compiled in 1986,
the Sensex is the oldest stock index in India.
CNX Nifty Junior The next rung of liquid securities after S&P CNX Nifty is the CNX Nifty Junior. It
may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making
up the 100 most liquid stocks in India.
CNX 100 100 most liquid stocks on NSE. It can be said as the combination of S&P CNX
Nifty & CNX Nifty Junior.
S&P CNX 500 The S&P CNX 500 is Indias first broad-based benchmark of the Indian capital
market for comparing portfolio returns vis-a-vis market returns. The S&P CNX
500 represents about 90.30% of total market capitalization and about 80.02% of the
total turnover on the NSE as on March 30, 2007.
S&P CNX Defty Almost every institutional investor and off-shore fund enterprise with an equity
exposure in India would like to have an instrument for measuring returns on their
equity investment in dollar terms. To facilitate this, a new index the S&P CNX
Defty-Dollar Denominated S&P CNX Nifty has been developed. S&P CNX Defty
is S&P CNX Nifty, measured in dollars.
Currency Forward A forward contract in the forex market that locks in the price at which an entity can
buy or sell a currency on a future date. Also known as "outright forward currency
transaction", "forward outright" or "FX forward".In currency forward contracts, the
contract holders are obligated to buy or sell the currency at a specified price, at a
specified quantity and on a specified future date. These contracts cannot be
transferred.
IPO The first sale of stock by a private company to the public. IPOs are often issued by
smaller, younger companies seeking capital to expand, but can also be done by
large privately-owned companies looking to become publicly traded.
Greenshoe Option A provision contained in an underwriting agreement that gives the underwriter the
right to sell investors more shares than originally planned by the issuer. This would
normally be done if the demand for a security issue proves higher than expected.
Legally referred to as an over-allotment option. A greenshoe option can provide
additional price stability to a security issue because the underwriter has the ability
to increase supply and smooth out price fluctuations if demand surges.
Greenshoe options typically allow underwriters to sell up to 15% more shares than
the original number set by the issuer, if demand conditions warrant such action.
However, some issuers prefer not to include greenshoe options in their
underwriting agreements under certain circumstances, such as if the issuer wants to
fund a specific project with a fixed amount of cost and does not want more capital
than it originally sought.The term is derived from the fact that the Green Shoe
Company was the first to issue this type of option.
Red Herring preliminary registration statement that must be filed with SEBI describing a new
issue of stock and the prospects of the issuing company.
There is no price or issue size stated in the red herring, and it is sometimes updated
several times before being called the final prospectus. It is known as a red herring
because it contains a passage in red that states the company is not attempting to sell
its shares before the registration is approved by the SEBI
Book Building The process by which an underwriter attempts to determine at what price to offer
an IPO based on demand from institutional investors. An underwriter "builds a
book" by accepting orders from fund managers indicating the number of shares
they desire and the price they are willing to pay.
Book Runner The managing or lead underwriter who maintains the books of securities sold for a
new issue. In other words, this person is the underwriter who "runs" the books.
Often the book runner is given credit for the total size of the deal.
Pump Priming Deficit financing & spending by a government on public works in an attempt to
revive economy during recession. It can raise the purchasing power of the people &
thus stimulate & revive economic activity to the point that deficit spending will no
longer be considered necessary to maintain the desired economy activity.
World
Development
Report
World Development Report 2008: Agriculture for Development
World Development Report 2007: Development & the next generation
World Development Report 2006: Equity & Development
World Development Report 2005: A Better Investment Climate for Everyone
Affliates of World
Bank
International Finance Corporation (IFC)
International Development Association (IDA)
Multilateral Investment Guarantee Agency
ICSID International Centre for Settlement of Investment Disputes
Hedge Fund An aggressively managed portfolio of investments that uses advanced investment
strategies such as leverage, long, short and derivative positions in both domestic
and international markets with the goal of generating high returns (either in an
absolute sense or over a specified market benchmark). Legally, hedge funds are
most often set up as private investment partnerships that are open to a limited
number of investors and require a very large initial minimum
investment. Investments in hedge funds are illiquid as they often require investors
keep their money in the fund for a minimum period of at least one year.
Medical Tourism Medical Tourism India (a.k.a. Health Tourism India) is a developing concept
whereby people from world over visit India for their medical and relaxation needs.
Most common treatments are heart surgery, knee transplant, cosmetic surgery and
dental care. India is known in particular for heart surgery, hip resurfacing and other
areas of advanced medicine. The government and private hospital groups are
committed to the goal of making India a world leader in the industry. The
industry's main appeal is low-cost treatment. Most estimates claim treatment costs
in India start at around a tenth of the price of comparable treatment in America or
Britain. Estimates of the value of medical tourism to India go as high as $2 billion
a year by 2012. The Indian government is taking steps to address other
infrastructure issues that can serve as a deterrant to the country's growth in medical
tourism. The south Indian city of Chennai has been declared India's Health Capital,
as it nets in 45% of health tourists from abroad and 30-40% of domestic health
tourists.[
ISO 9000 ISO 9000 is a family of standards for quality management systems. ISO 9000 is
maintained by ISO, the International Organization for Standardization and is
administered by accreditation and certification bodies. Some of the requirements in
ISO 9001 (which is one of the standards in the ISO 9000 family) would include:
a set of procedures that cover all key processes in the business;
monitoring processes to ensure they are effective;
keeping adequate records;
checking output for defects, with appropriate corrective action where
necessary;
regularly reviewing individual processes and the quality system itself for
effectiveness; and
facilitating continual improvement
ISO 14000 The ISO 14000 environmental management standards exist to help organizations
minimize how their operations negatively affect the environment (cause adverse
changes to air, water, or land), comply with applicable laws, regulations, and other
environmentally oriented requirements, and continually improve on the above.
ISO 14000 is similar to ISO 9000 quality management in that both pertain to the
process (the comprehensive outcome of how a product is produced) rather than to
the product itself. The overall idea is to establish an organized approach to
systematically reduce the impact of the environmental aspects which an
organization can control. Effective tools for the analysis of environmental aspects
of an organization and for the generation of options for improvement are provided
by the concept of Cleaner Production.
Non Factor
Services
Non-factor services refer to all invisible receipts or payments not attributable to
any of the conventional `factors of production', i.e labour (remittances from
overseas migrants) and capital (income from investments, interest payments,
dividend repatriation). Thus, non-factor services include forex earnings and
expenses on account of tourism, shipping/freight and various `miscellaneous' sub-
heads, under which export of software features.
WTOs Agreement
on Agriculture &
Subsidies
Amber Box: All domestic subsidies such as market price support - that are
considered to distort production and trade. Amber Box subsidies are subject to
WTO reduction commitments. It is deemed to be trade distorting primarily by
encouraging excessive production.
Blue Box: Subsidy payments that are directly linked to acreage or animal numbers,
but under schemes which also limit production by imposing production quotas or
requiring farmers to set-aside part of their land. These are deemed by WTO rules to
be partially decoupled from production and are not subject to WTO reduction
commitments. In the EU, they are commonly known as direct payments. These are
payments linked to production limiting program.
Green Box: subsidies that are deemed not to distort trade, or at most cause
minimal distortion and are not subject to WTO reduction commitments. For the EU
and US one of the most important allowable subsidies in this category is decoupled
support paid directly to producers. Such support should not relate to current
production levels or prices. It can also be given on condition that no production
shall be required in order to receive such payments.
NAMA The negotiations Non-Agriculture Market Access (NAMA) are based on the Doha
mandate of 2001 that calls for a reduction or elimination in tariff peaks, tariff
escalation, high tariffs and non-tariff barriers, particularly on goods that are of
export value and therefore of interest to developing countries. NAMA refers to all
those products that are not covered by the Agreement on Agriculture or the
negotiations on services. In practice, NAMA products include manufacturing
products, fuels and mining products, fish and fish products, and forestry products.
The NAMA negotiations have been considered important by the WTO as NAMA
products account for almost 90% of the world's mechandise exports.
MIGA The Multilateral Investment Guarantee Agency (MIGA) is a member of the World
Bank group. It was established to promote foreign direct investment into
developing countries. MIGA was founded in 1988 with a capital base of $1 billion
and is headquartered in Washington, D.C. MIGA promotes foreign direct
investment into developing countries by insuring investors against political risk,
advising governments on attracting investment, sharing information through on-
line investment information services, and mediating disputes between investors and
governments. MIGA also requires host country government approval for every
project. MIGA tries to work with host governments - resolving claims before they
are filed
Inflation Types 1 - Creeping Inflation: When prices rise at very slow rate, i.e. creepers speed, it
is called creeping inflation. Generally 3% annual rise in prices is considered as
creeping inflation.
2- Walking or Trotting Inflation: When inflation is in between 3% to 7%, its
regarded as walking or trotting inflation. Some economists have extended the
boundary of this type of inflation up to 10% per annum. This type of inflation is
considered as a warning signal for the government to take some measures to
control the situation.
3- Running Inflation: This type of inflation comes into action when theres a
rapid rise in prices and the range of this type lies in between 10% to 20% per
annum. This type of inflation is controllable only by strong monetary and fiscal
measures, lest it will be turned into hyper inflation.
4- Hyper Inflation or Galloping Inflation: The rise of prices from 20% to 100 %
per annum is regarded as hyper inflation or galloping inflation. This case of
inflation is un controllable.
5- Demand Pull Inflation: This type of inflation is results as an excess demand. In
this case supply remains constant (couldnt be upgraded as per demand). So
consequently, the prices go up.
6- Cost Push Inflation: When theres increase in money-wages at speedier rate
than that of the rise in the productivity of labour, it results as increased cost of
production which furthers the increase in prices. This type of inflation is regarded
as cost push inflation.
7- Mixed Inflation: Majority of the economists hold that, inflation is neither
completely demand pull nor completely cost push, the actual inflationary
process contains the elements of both. Excess demand and increase in money
wages operate at the same time, but its not necessary that they start at the same
time.
8- Markup inflation: Garner Akley put forward the theory of mark up inflation.
In simple words it is an advanced explaination of Mixed inflation. According to
Akley First comes demand pull inflation, and it is led by cost push inflation.
Markup inflation comes to happen when excess demand increases the prices, which
stimulates the production. The increasing production creates excessive demand for
the factors of production, and the excessive demand for the factors of production
further raises the prices.
9- Stagflation: Stagflation is a situation, whereby economy faces stagnation of
output and unemployment along with a high rate of inflation. This situation is also
known as inflationary recession.
Disinflation &
Deflation
Disinflation is a decrease in the rate of inflation. Being how much prices are
increasing per unit of time, it can be expressed using the word disinflation: The
slowing of the rate of inflation per unit of time. For example in one month the rate
of inflation could be was 4.4% and in May the rate of inflation was 4.0%. In this
instance the price of goods and services is still increasing; however, it is increasing
at a slower rate, 0.4% less, than a month before. It should not be confused with
deflation, which is an overall decrease in prices. Disinflation is generally
considered to be a very positive state for the economy. Over the last twenty years
North America has seen steady disinflation, and many credit this with the strong
growth during this period. While disinflation is generally perceived as positive, it is
not good for the effect to go so far as deflation, which is generally perceived to be a
very negative state for an economy.
Deflation is a decrease in the general price level over a period of time. Deflation is
the opposite of inflation. For economists especially, the term has been and is
sometimes used to refer to a decrease in the size of the money supply (as a
proximate cause of the decrease in the general price level). The latter is now more
often referred to as a 'contraction' of the money supply. During deflation the
demand for liquidity goes up, in preference to goods or interest. During deflation
the purchasing power of money increases.Deflation is considered a problem in a
modern economy because of the potential of a deflationary spiral and its
association with the Great Depression, although not all episodes of deflation
correspond to periods of poor economic growth historically.
Core Banking
Solution
The platform where communication technology and information technology are
merged to suit core needs of banking is known as Core Banking Solutions. Here
computer software is developed to perform core operations of banking like
recording of transactions, passbook maintenance, interest calculations on loans and
deposits, customer records, balance of payments and withdrawal are done. This
software is installed at different branches of bank and then interconnected by
means of communication lines like telephones, satellite, internet etc. It allows the
user (customers) to operate accounts from any branch if it has installed core
banking solutions. This new platform has changed the way banks are working.
Now many advanced features like regulatory requirements and other specialised
services like share (stock) trading are being provided.
SEMFEX II The Self Employment Scheme For Ex-servicemen (SEMFEX-II) has been in
operation since 1988. The scheme has been specially designed to provide a
comprehensive package of credit for encouraging ex-servicemen, disabled service
personnel, war widows and widows of ex-servicemen to undertake agricultural and
allied activities or to set up non-farm units in rural areas to earn their livelihood for
leading a dignified life.
SEMFEX III Scheme has been formulated Jointly by the DGR (Directorate General
Resettlement) and Khadi and Village Industries Commission (KVIC) & launched
in 1991.
Scheme is operative in rural areas.
Village Industries within the purview of KVIC are only financed.
Loan is available for individual Ex-Servicemen and Co-operatives.
Individual projects can be financed upto Rs 10.00 Lakhs by KVIC/KVIBS.
Upper loan limit is Rs 25.00 Lakhs.
Foreign
Investment
Promotion Board
(FIPB)
Its objective is to promote FDI into India by undertaking investment promotion
activities in India and abroad by facilitating investment in the country through
international companies, non-resident Indians and other foreign investors. It
identifies sectors & countries in which & from which more & more of foreign
investment is required & can be channelized.
FIPC Foreign Investment Promotion Council. Its a body of experts to target specific
countries & specific sectors to attract FDI by projecting Indias image as an
attractive destination.
Foreign
Investment
Implementation
Authority (FIIA)
Government of India has set up the Foreign Investment Implementation Authority
(FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals
into implementation, to provide a pro-active one stop after care service to foreign
investors by helping them obtain necessary approvals, sort out operational
problems and meet with various Government agencies to find solution to their
problems. FIPB & FIIA are the two agencies promoting foreign investment in
India.
FDI Policy in
India
India has among the most liberal and transparent policies on FDI among the
emerging economies. FDI up to 100% is allowed under the automatic route in all
activities/sectors except the following, which require prior approval of the
Government:-
1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing financial/technical
collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial
service sector and where Securities and Exchange Board of India (substantial
acquisition of shares and takeovers) regulations, 1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS under sectors in
which FDI is not permitted
Most of the sectors fall under the automatic route for FDI. In these sectors,
investment could be made without approval of the central government. The sectors
that are not in the automatic route, investment requires prior approval of the
Central Government. The approval in granted by Foreign Investment Promotion
Board (FIPB). In few sectors, FDI is not allowed.
Automatic Route FDI in sectors/activities to the extent permitted under automatic route does not
require any prior approval either by the Government or RBI. The investors are only
required to notify the Regional Office concerned of RBI within 30 days of receipt
of inward remittances and file the required documents with that office within 30
days of issue of shares of foreign investors.
FDI Requiring
Government
Approval
FDI in activities not covered under the automatic route require prior government
approval. Approvals of all such proposals including composite proposals involving
foreign investment/foreign technical collaboration is granted on the
recommendations of Foreign Investment Promotion Board (FIPB).
Prohibited Sectors
for FDI
The extant policy does not permit FDI in the following cases:
i. Gambling and betting
ii. Lottery Business
iii. Atomic Energy
iv. Retail Trading
v. Agricultural or plantation activities of Agriculture (excluding Floriculture,
Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and
Cultivation of Vegetables, Mushrooms etc., under controlled conditions and
services related to agro and allied sectors) and Plantations (other than Tea
Plantations)
Industries
Requiring
Compulsory
Licensing
With progressive liberalization and deregulation of the economy, industrial license
is required in very few cases. Industrial licenses are regulated under the Industries
(Development and Regulation) Act 1951. At present, industrial license is required
only for the following: -
1. Industries retained under compulsory licensing
2. Manufacture of items reserved for small scale sector by larger units
3. When the proposed location attracts locational restriction
The following industries require compulsory license: -
I Alcoholics drinks
II Cigarettes and tobacco products
III Electronic aerospace and defense equipment
IV Explosives
V Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-
isocynates of hydro carbon and derivatives
Engel Curve An Engel curve is the relationship between the amount of a product that people are
willing to buy and their income. An Engel curve is shown below.
Engels Law
(UPSC 2007)
Engel's law is an observation in economics stating that, with a given set of tastes
and preferences, as income rises, the proportion of income spent on food falls, even
if actual expenditure on food rises. In other words, the income elasticity of demand
of food is less than 1. The law was named after the statistician Ernst Engel.
Lorenz Curve &
Gini Coefficient
A Lorenz curve shows the degree of inequality that exists in the distributions of
two variables, and is often used to illustrate the extent that income or wealth are
distributed unequally in a particular society.
The Gini coefficient is the area between the line of perfect equality and the
observed Lorenz curve, as a percentage of the area between the line of perfect
equality and the line of perfect inequality.A Gini coefficient is a summary
numerical measure of how unequally one variable is related to another. The Gini
coefficient is a number between 0 and 1, where perfect equality has a Gini
coefficint of zero, and absolute inequality yields a Gini coefficint of 1.
Trickle Down
Theory (UPSC
2007)
An economic theory given by Simon Kuznet which states that investing money in
companies and giving them tax breaks is the best way to stimulate the economy.
Proponents of this theory believe that when government helps companies, they will
produce more and thereby hire more people and raise salaries. The people, in turn,
will have more money to spend in the economy.
Tight Money or
Dear Money
A situation in which money or loans are very difficult to obtain in a given country.
If you do have the opportunity to secure a loan, then interest rates are usually
extremely high. Also known as "dear money".
Soft Money or
Cheap Money
Credit available at low rate of interest.
Soft Currency Another name for "weak currency". The values of soft currencies fluctuate often,
and other countries do not want to hold these currencies due to political or
economic uncertainty within the country with the soft currency. Currencies from
most developing countries are considered to be soft currencies. Often, governments
from these developing countries will set unrealistically high exchange rates,
pegging their currency to a currency such as the U.S. dollar.
Hard Currency A currency, usually from a highly industrialized country, that is widely accepted
around the world as a form of payment for goods and services. A hard currency is
expected to remain relatively stable through a short period of time, and to be highly
liquid in the forex market.Another criterion for a hard currency is that the currency
must come from a politically and economically stable country. The U.S. dollar and
the British pound are good examples of hard currencies.
STAG Stock market investor who invests in IPO in the hope of selling it immediately
upon listing and making a profit.
Greshams Law Bad money puts good money out of circulation. It was given by Sir Thomas
Gresham.
Balance of
Payments
The balance of payments, (or BOP) measures the payments that flow between any
individual country and all other countries. It is used to summarize all international
economic transactions for that country during a specific time period, usually a year.
The BOP is determined by the country's exports and imports of goods, services,
and financial capital, as well as financial transfers. It reflects all payments and
liabilities to foreigners (debits) and all payments and obligations received from
foreigners (credits). The components of balance of payments are:
1. Current Account
2. Capital Account
3. Financial Account
4. Net Errors and Omissions
5. Official reserves
The current account is the sum of net sales from trade in goods and services, net
factor income (such as interest payments from abroad), and net unilateral transfers
from abroad (such as foreign aid, gifts). Positive net sales to abroad corresponds to
a current account surplus; negative net sales to abroad corresponds to a current
account deficit. Trade in goods is also known as trade in visibles or tangibles,
Trade in services is also known as trade in invisibles or intangibles.
The capital account "records the international flows of transfer payments relating
to capital items". It therefore records a country's inflows and outflows of payments
and transfer of ownership of fixed assets (capital goods). Examples of such goods
could be factories and so on.
The financial account is the net change in foreign ownership of domestic financial
assets. If foreign ownership of domestic financial assets has increased more quickly
than domestic ownership of foreign assets in a given year, then the domestic
country has a financial account surplus. On the other hand, if domestic ownership
of foreign financial assets has increased more quickly than foreign ownership of
domestic assets, then the domestic country has a financial account deficit. The
accounting entries in the financial account record the purchase and sale of domestic
and foreign assets. These assets are divided into categories such as Foreign Direct
Investment (FDI), Portfolio Investment (which includes trade in stocks and bonds),
and Other Investment (which includes transactions in currency and bank deposits).
Net Errors & Omissions only exists to correct any possible errors made in
accounting for the three other accounts. These errors are common to occur due to
the complexity of the calculations.
The official reserves account records the current stock of reserve assets (and often
simply referred to as foreign exchange reserves) available to and controlled by the
country's authorities for financing of international payment imbalances, foreign
exchange intervention and other uses.
Multi Fibre
Agreement (MFA)
The Multi Fibre Arrangement (MFA) (a.k.a. Agreement on Textile and Clothing
(ATC)) governed the world trade in textiles and garments from 1974 through 2004,
imposing quotas on the amount developing countries could export to developed
countries. It expired on 1 January 2005.
The MFA was introduced in 1974 as a short-term measure intended to allow
developed countries to adjust to imports from the developing world. Developing
countries have a natural advantage in textile production because it is labor intensive
and they have low labor costs.
Indias Export-
Import Policy
(2002-07)
HIGHLIGHTS OF EXIM POLICY 2002-07 (as amended upto 31.3.2003)
Service Exports
Duty free import facility for service sector having a minimum foreign exchange
earning of Rs.10 lakhs. The duty free entitlement shall be 10% of the average
foreign exchange earned in the preceding three licensing years
Agro Exports
Corporate sector with proven credential will be encouraged to sponsor Agri Export
Zone for boosting agro exports. The corporates to provide services such as
provision of pre/post harvest treatment and operations, plant protection,
Status Holders
Duty-free import entitlement for status holders having incremental growth of more
than 25% in FOB value of exports (in free foreign exchange). This facility shall
however be available to status holders having a minimum export turnover of Rs.25
crore (in free foreign exchange). The duty free entitlement shall be 10% of the
incremental growth in exports and can be used for import of capital goods, office
equipment and inputs for their own factory or the factory of the
associate/supporting manufacturer/job worker.
Hardware/Software
To promote growth of exports in embedded software, hardware shall be admissible
for duty free import for testing and development purposes.
Gem & Jewellery Sector
Diamond & Jewellery Dollar Account for exporters dealing in purchase/sale of
diamonds and diamond studded jewellery. Nominated agencies to accept payment
in dollars for cost of import of precious metals from EEFC account of exporter.
Gem & Jewellery units in SEZ and EOUs can receive precious metal i.e.
Gold/Silver/Platinum prior to exports or post exports equivalent to value of
jewellery exported. This means that they can bring export proceeds in kind against
the present provision of bringing in cash only.
Export Clusters
Upgradation of infrastructure in existing clusters/industrial locations under the
Department of Industrial Policy & Promotion (DIPP) scheme to increase overall
competitiveness of the export clusters
Removal of Quantitative Restrictions
Import of 69 items covering animal products, vegetables and spices, antibiotics and
films removed from restricted list.
Special Economic Zones Scheme
Sales from Domestic Tariff Area (DTA) to SEZs to be treated as export. This
would now entitle domestic suppliers to Drawback/DEPB benefits, CST exemption
and
Reduction in penal interest rate from 24 percent to 15 percent for all old cases of
default under Exim Policy.
Indian Tax System The government of India imposes a progressive income tax on taxable. The Income
Tax department is governed by the Central Board for Direct Taxes (CBDT. The
individual income tax is a progressive tax with three brackets. No income tax is
applicable on income up to INR 110,000 per year. (INR 145,000 for women and
INR 195,000 for senior citizens). The highest bracket is 30%, with a 10%
surcharge (tax on tax) for incomes above Rs. 10 lakh (INR 1 million). All income
taxes are subject to 3% education cess, applicable on the tax paid.
Business income is taxed at a flat rate of 33% for Indian companies and 40% for
foreign companies.[8] Dividends are income tax free to shareholders. Instead,
companies are charged a 15% dividend distribution tax. Long term capital gains is
exempted from tax provided securities transaction tax paid. For sales of shares in
recognized stock exchanges, long term (held above 1 year) capital gains are not
taxed, and short term (less than 1 year of holding) gains are charged 10% tax
provided the Securities Transaction Tax has been paid. All other short term gains
are clubbed with income in the year the gains occur.
Since April 01, 2005, most of the State Governments in India have replaced sales
tax with VAT.
Taxes Levied by Central Government
Direct Taxes
Tax on Corporate Income
Capital Gains Tax
Personal Income Tax
Tax Incentives
Double Taxation Avoidance Treaty
Indirect Taxes
Excise Duty
Customs Duty
Service Tax
Securities Transaction Tax
Taxes Levied by State Governments and Local Bodies
Sales Tax/VAT
Other Taxes
Trade Barrier A trade barrier is a general term that describes any government policy or regulation
that restricts international trade. The barriers can take many forms, including:
Import duties
Import licenses
Export licenses
Import quotas
Tariffs
Subsidies
Non-tariff barriers to trade
Voluntary Export Restraints
Local Content Requirements
Non Tariff Trade
Barriers
Non-tariff barriers to trade are trade barriers that restrict imports but are not in the
usual form of a tariff. Some of the common examples are anti-dumping measures
and countervailing duties, which, although they are called "non-tariff" barriers,
have the effect of tariffs but are only imposed under certain conditions. Their use
has risen sharply after the WTO rules led to a very significant reduction in tariff
use.
Countervailing
Duty
(UPSC 2007)
Countervailing duties (CVDs) are a means to restrict international trade. They are
imposed when a foreign country subsidizes its exports, hurting domestic producers.
Incremental
Capital Output
Ratio
The Incremental Capital-Output Ratio (ICOR), is the ratio of investment to growth
which equals to 1 divided by the marginal product of capital. The higher the ICOR,
the lower the productivity of capital. The ICOR can be thought of as a measure of
the inefficiency with which capital is used.
CCIL
(UPSC 2007)
The Clearing Corporation of India Ltd. (CCIL) was set up in 2001 for providing
exclusive clearing and settlement for transactions in Money, GSecs and Foreign
Exchange.
SARFAESI Act
2002
Securitization & Reconstruction of Financial Assets & Enforcement of Security
Interests. Enacted in 2002 to empower banks to sell the assets pledged by the
borrower without prior permission of the court to recover Non-Performing Assets
(NPA).
Administered
Price
Price of a good that is specified by a governmental or some other nonmarket
agency. Wage price controls and rent controls are examples of administered prices.
MFN
(UPSC 2007)
Most favoured nation (MFN), is a status awarded by one nation to another in
international trade. It means that the receiving nation will be granted all trade
advantages - such as low tariffs - that any other nation also receives. In effect,
having MFN status means that one's nation will not be treated worse than anyone
else's nation.
Merit Goods
(UPSC 2007)
Merit goods are goods and services where the social benefits exceed the private
benefits. With merit goods - the state is concerned with maximising the
consumption of certain goods which it deems to be desirable; goods and services
where the social benefits exceed the private benefits, e.g. Education and Healthcare
are assumed to generate positive externalities.
Non-price
competition
Trying to win business from rivals other than by charging a lower PRICE. Methods
include ADVERTISING, slightly differentiating your product etc.
Antitrust Government policy for dealing with monopoly. Antitrust laws aim to stop abuses
of market power by big companies and, sometimes, to prevent corporate mergers
and acquisitions that would create or strengthen a monopolist.
Autarky The idea that a country should be self-sufficient and not take part in international
trade
Capital Adequacy
Ratio
The ratio of a BANKs CAPITAL to its total ASSETS, required by regulators to be
above a minimum (adequate) level so that there is little RISK of the bank going
bust. How high this minimum level is may vary according to how risky a banks
activities are.
Beta Beta measures the sensitivity of the price of a particular asset to changes in the
market as a whole.
Bretton Woods A conference held at Bretton Woods, New Hampshire, in 1944, which designed the
structure of the international monetary system after the second world war and set
up the IMF and the world bank. It was agreed that the exchange rates of IMF
members would be pegged to the dollar, with a maximum variation of 1% either
side of the agreed rate. Rates could be adjusted more sharply only if a country's
balance of payments was in fundamental disequilibrium. In August 1971 economic
troubles and the cost of financing the Vietnam war led the American president,
Richard Nixon, to devalue the dollar. This shattered confidence in the fixed
exchange rate system and by 1973 all of the main currencies were floating freely,
at rates set mostly by market forces rather than government fiat.
Capital Flight When CAPITAL flows rapidly out of a country, usually because something
happens which causes investors suddenly to lose confidence in its economy.This is
often associated with a sharp fall in the EXCHANGE RATE of the abandoned
countrys currency.
Catch Up Effect In any period, the economies of countries that start off poor generally grow faster
than the economies of countries that start off rich. As a result, the NATIONAL
INCOME of poor countries usually catches up with the national income of rich
countries.
Classical &
Keynesian
Economics
The dominant theory of economics from the 18th century to the 20th century, when
it evolved into NEO-CLASSICAL ECONOMICS. Classical economists, who
included Adam SMITH, David RICARDO and John Stuart Mill, believed that the
pursuit of individual self-interest produced the greatest possible economic benefits
for society as a whole through the power of the INVISIBLE HAND. They also
believed that an economy is always in EQUILIBRIUM or moving towards it.
In the 1920s and 1930s, John Maynard KEYNES attacked some of the main beliefs
of classical and neo-classical economics, which became unfashionable. In
particular, he argued that the rate of interest was determined or influenced by the
speculative actions of investors in BONDS and that wages were inflexible
downwards, so that if demand for labour fell, the result would be higher
UNEMPLOYMENT rather than cheaper workers.
Comparative
Advantage
It shows how countries can gain from trading with each other even if one of them is
more efficient it has an ABSOLUTE ADVANTAGE in every sort of economic
activity. Comparative advantage is about identifying which activities a country (or
firm or individual) is most efficient at doing.
Contestable
Market
A market in which an inefficient firm, or one earning excess profits, is likely to be
driven out by a more efficient or less profitable rival.
Externality An economic side-effect. Externalities are costs or benefits arising from an
economic activity that affect somebody other than the people engaged in the
economic activity and are not reflected fully in PRICES. For instance, smoke
pumped out by a factory may impose clean-up costs on nearby residents; bees kept
to produce honey may pollinate plants belonging to a nearby farmer, thus boosting
his crop.
Econometrics Mathematics and sophisticated computing applied to ECONOMICS
Efficient Market
Hypothesis
The efficient market hypothesis says that the PRICE of a financial ASSET reflects
all the INFORMATION available and responds only to unexpected news.
Elasticity A measure of the responsiveness of one variable to changes in another. Economists
have identified four main types.
PRICE ELASTICITY measures how much the quantity of SUPPLY of a good, or
DEMAND for it, changes if its PRICE changes. If the percentage change in
quantity is more than the percentage change in price, the good is price elastic; if it
is less, the good is INELASTIC.
INCOME elasticity of demand measures how the quantity demanded changes
when income increases.
Cross-elasticity shows how the demand for one good (say, coffee) changes when
the price of another good (say, tea) changes. If they are SUBSTITUTE GOODS
(tea and coffee) the cross-elasticity will be positive: an increase in the price of tea
will increase demand for coffee. If they are COMPLEMENTARY GOODS (tea
and teapots) the cross-elasticity will be negative. If they are unrelated (tea and oil)
the cross-elasticity will be zero.
Elasticity of substitution describes how easily one input in the production
process, such as LABOUR, can be substituted for another, such as machinery.
Eurodollar A deposit in dollars held in a BANK outside the United States. Such deposits are
often set up to avoid taxes and currency exchange costs. They are frequently lent
out and have become an important method of CREDIT CREATION.
Currency Board A means by which some countries try to defend their currency from speculative
attack. A country that introduces a currency board commits itself to converting its
domestic currency on demand at a fixed EXCHANGE RATE. To make this
commit ment credible, the currency board holds RESERVES of foreign currency
(or GOLD or some other liquid ASSET) equal at the fixed rate of exchange to at
least 100% of the value of the domestic currency that is issued.
Unlike a conventional CENTRAL BANK, which can print MONEY at will, a
currency board can issue domestic notes and coins only when there are enough
foreign exchange reserves to back it.
Currency Peg When a GOVERNMENT announces that the EXCHANGE RATE of its currency
is fixed against another currency or currencies.
Balance of
Payments
The total of all the money coming into a country from abroad less all of the money
going out of the country during the same period. This is usually broken down into
the current account and the capital account.
The current account includes:
visible trade (known as merchandise trade in the United States), which is the
value of exports and imports of physical goods;
invisible trade, which is receipts and payments for services, such as banking or
advertising, and other intangible goods, such as copyrights, as well as cross-
border dividend and interest payments;
private transfers, such as money sent home by expatriate workers;
official transfers, such as international aid.
The capital account includes:
long-term capital flows, such as money invested in foreign firms, and profits
made by selling those investments and bringing the money home;
short-term capital flows, such as money invested in foreign currencies by
international speculators, and funds moved around the world for business
purposes by multinational companies. These short-term flows can lead to sharp
movements in exchange rates, which bear little relation to what currencies
should be worth judging by fundamental measures of value such as purchasing
power parity.
As bills must be paid, ultimately a country's accounts must balance (although
because real life is never that neat a balancing item is usually inserted to cover up
the inconsistencies).
Factor Cost A measure of OUTPUT reflecting the costs of the factors of production used, rather
than market prices, which may differ because of indirect tax and subsidy.
Factors of
Production
The ingredients of economic activity: land, labour, capital and enterprise.
Fiscal Neutrality When the net effect of taxation and public spending is neutral i.e. neither
stimulating nor dampening demand. The term can be used to describe the overall
stance of fiscal policy: a balanced budget is neutral, as total tax revenue equals
total public spending.
Fiscal Policy One of the two instruments of macroeconomic policy; monetary policy's side-kick.
It comprises public spending and taxation, and any other government income or
assistance to the private sector (such as tax breaks). It can be used to influence the
level of demand in the economy, usually with the twin goals of getting
unemployment as low as possible without triggering excessive inflation.
Monetary Policy What a CENTRAL BANK does to control the MONEY SUPPLY, and thereby
manage DEMAND. Monetary policy involves OPEN-MARKET OPERATIONS,
RESERVE REQUIREMENTS and changing the short-term rate of interest. It is
one of the two main tools of MACROECONOMIC POLICY, the side-kick of
FISCAL POLICY, and is easier said than done well.
The RBI uses the interest rate, Open Market Operations (OMO), changes in banks'
CRR and primary placements of government debt to control the money supply.
OMO, primary placements and changes in the CRR are the most popular
instruments used.
Under the OMO, the RBI buys or sells government bonds in the secondary
market. By absorbing bonds, it drives up bond yields and injects money into the
market. When it sells bonds, it does so to suck money out of the system.
The changes in CRR affect the amount of free cash that banks can use to lend -
reducing the amount of money for lending cuts into overall liquidity, driving
interest rates up, lowering inflation and sucking money out of markets.
Primary deals in government bonds are a method to intervene directly in
markets, followed by the RBI. By directly buying new bonds from the
government at lower than market rates, the RBI tries to limit the rise in interest
rates that higher government borrowings would lead to.
Hawala/Hundi Hawala (also known as hundi) is an informal value transfer system based on
performance and honor of a huge network of money brokers which are primarily
located in the Middle East, Africa and Asia. In the most basic variant of the hawala
system, money is transferred via a network of hawala brokers, or hawaladars. A
customer approaches a hawala broker in one city and gives a sum of money to be
transferred to a recipient in another, usually foreign, city. The hawala broker calls
another hawala broker in the recipient's city, gives disposition instructions of the
funds (usually minus a small commission), and promises to settle the debt at a later
date.
Horizontal
Integration
Merging with another firm just like yours, for example, two biscuit makers
becoming one. Contrast with VERTICAL INTEGRATION, which is merging with
a firm at a different stage in the SUPPLY chain. Horizontal integration often raises
ANTITRUST concerns, as the combined firm will have a larger market share than
either firm did before merging.
Hot Money Money that is held in one currency but is liable to switch to another currency at a
moments notice in search of the highest available RETURNS, thereby causing the
first currencys EXCHANGE RATE to plummet.
Hypothecation Earmarking taxes for a specific purpose. It may be a clever way to get around
public hostility to paying more in TAXATION. If people are told that a specific
share of their INCOME TAX will go to some popular cause, say education or
health, they may be more willing to cough up.
Oligopoly When a few FIRMS dominate a market. Often they can together behave as if they
were a single MONOPOLY, perhaps by forming a CARTEL. Or they may collude
informally, by preferring gentle NON-PRICE COMPETITION to a bloody PRICE
war. Because what one firm can do depends on what the other firms do, the
behaviour of oligopolists is hard to predict. When they do compete on price, they
may produce as much and charge as little as if they were in a market with
PERFECT COMPETITION.
Income Effect A change in the DEMAND for a good or service caused by a change in the
INCOME of consumers rather than, say, a change in consumer tastes. Contrast
with SUBSTITUTION EFFECT.
Inelastic When the SUPPLY or DEMAND for something is insensitive to changes in
another variable, such as PRICE.
Inferior Goods Products that are less in demand as consumers get richer. For NORMAL GOODS,
DEMAND increases as consumers have more to spend.
Invisible Hand Adam Smiths term for the ability of the free market to allocate FACTORS OF
PRODUCTION, goods and SERVICES to their most valuable use.
Okuns Law A description of what happens to UNEMPLOYMENT when the rate of GROWTH
of GDP changes, based on empirical research by Arthur Okun
J Curve The shape of the trend of a countrys trade balance following a DEVALUATION.
A lower EXCHANGE RATE initially means cheaper EXPORTS and more
expensive IMPORTS, making the current account worse (a bigger DEFICIT or
smaller surplus). After a while, though, the volume of exports will start to rise
because of their lower PRICE to foreign buyers, and domestic consumers will buy
fewer of the costlier imports. Eventually, the trade balance will improve on what it
was before the devaluation. If there is a currency APPRECIATION there may be
an inverted J-curve.
Kleptocracy Corrupt, thieving GOVERNMENT, in which the politicians and bureaucrats in
charge use the powers of the state to feather their own nests.
Laissez Faire Let-it-be ECONOMICS: the belief that an economy functions best when there is no
interference by GOVERNMENT.
Leveraged Buyout Buying a company using borrowed MONEY to pay most of the purchase PRICE.
The DEBT is secured against the ASSETS of the company being acquired.
LIBOR Short for London interbank offered rate, the rate of INTEREST that top-quality
BANKS charge each other for loans.
Liquidity Trap When MONETARY POLICY becomes impotent. Cutting the rate of INTEREST is
supposed to be the escape route from economic RECESSION: boosting the
MONEY SUPPLY, increasing DEMAND and thus reducing UNEMPLOYMENT.
But KEYNES argued that sometimes cutting the rate of interest, even to zero,
would not help. People, BANKS and FIRMS could become so RISK AVERSE that
they preferred the LIQUIDITY of cash to offering CREDIT or using the credit that
is on offer. In such circumstances, the economy would be trapped in recession,
despite the best efforts of monetary policymakers
Luxuries Goods and SERVICES that have a high ELASTICITY of DEMAND. When the
PRICE of, say, a Caribbean holiday rises, the number of vacations demanded falls
sharply. Likewise, demand for Caribbean holidays rises significantly as
AVERAGE INCOME increases, certainly by more than demand for many
NORMAL GOODS. Contrast this with necessities, such as milk or bread, which
people usually demand in quite similar quantities whatever their income and
whatever the price.
Deadweight
Cost/Loss
The extent to which the value and impact of a tax, tax relief or SUBSIDY is
reduced because of its side-effects. For instance, increasing the amount of tax
levied on workers pay will lead some workers to stop working or work less, so
reducing the amount of extra tax to be collected. However, creating a tax relief or
subsidy to encourage people to buy life insurance would have a deadweight cost
because people who would have bought insurance anyway would benefit.
Marshall Plan Probably the most successful programme of INTERNATIONAL AID and nation
building in history. It was named after General George Marshall, an American
secretary of state, who at the end of the second world war proposed giving aid to
Western Europe to rebuild its war-torn economies.
Menu Cost How much it costs to change PRICES. Just as a restaurant has to print a new menu
when it changes the price of its food, so many other FIRMS face a substantial
outlay each time they cut or raise what they charge. Such menu costs mean that
firms may be reluctant to change their prices every time there is a shift in the
balance of SUPPLY and DEMAND, so there will be STICKY PRICES and the
market for their OUTPUT will be in DISEQUILIBRIUM. The Internet may
sharply reduce menu costs as it allows prices to be changed at the click of a mouse,
which may improve EFFICIENCY by keeping markets more often in
EQUILIBRIUM.
Misery Index
UPSC - 2001
Created by Economist Arthur Okun. The sum of a countrys INFLATION and
UNEMPLOYMENT rates. The higher the score, the greater is the economic
misery.
Monetary
Neutrality
Changes in the MONEY SUPPLY have no effect on real economic variables such
as OUTPUT, real INTEREST rates and UNEMPLOYMENT. If the CENTRAL
BANK doubles the money supply, the PRICE level will double too.Today few
economists think that pure monetary neutrality exists in the real world, at least in
the short run.
Money Market A segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. The money market is used by
participants as a means for borrowing and lending in the short term, from several
days to just under a year. Money market securities consist of negotiable certificates
of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper,
municipal notes, federal funds and repurchase agreements (repos).
The money market is used by a wide array of participants, from a company raising
money by selling commercial paper into the market to an investor purchasing CDs
as a safe place to park money in the short term. The money market is typically seen
as a safe place to put money due the highly liquid nature of the securities and short
maturities, but there are risks in the market that any investor needs to be aware of
including the risk of default on securities such as commercial paper.
Capital Market Markets in SECURITIES such as BONDS and SHARES. Governments and
companies use them to raise longer-term CAPITAL from investors, although few
of the millions of capital-market transactions every day involve the issuer of the
security. Most trades are in the SECONDARY MARKETS, between investors who
have bought the securities and other investors who want to buy them. Contrast with
MONEY MARKETS, where short-term capital is raised.
Commercial Paper An unsecured, short-term debt instrument issued by a corporation, typically for the
financing of accounts receivable, inventories and meeting short-term liabilities.
Maturities on commercial paper rarely range any longer than 270 days. The debt is
usually issued at a discount, reflecting prevailing market interest rates.
Commercial paper is not usually backed by any form of collateral, so only firms
with high-quality debt ratings will easily find buyers without having to offer a
substantial discount (higher cost) for the debt issue.
Certificate of
Deposit
CD is a savings certificate entitling the bearer to receive interest. A CD bears a
maturity date, a specified fixed interest rate and can be issued in any denomination.
CDs are generally issued by commercial banks. The term of a CD generally ranges
from one month to five years.
A certificate of deposit is a promissory note issued by a bank. It is a time deposit
that restricts holders from withdrawing funds on demand. Although it is still
possible to withdraw the money, this action will often incur a penalty.
Bankers
Acceptance
A short-term credit investment created by a non-financial firm and guaranteed by a
bank. Acceptances are traded at a discount from face value on the secondary
market. Banker's acceptances are very similar to T-bills and are often used in
money market funds.
Treasury Bills A form of short-term GOVERNMENT DEBT. Treasury bills usually mature after
three months. They are used for managing fluctuations in the governments short-
run cash needs. Most government borrowing takes the form of longer-term
BONDS.
Repo Repos are classified as a money-market instrument. They are usually used to raise
short-term capital. A form of short-term borrowing for dealers in government
securities. The dealer sells the government securities to investors, usually on an
overnight basis, and buys them back the following day.
For the party selling the security (and agreeing to repurchase it in the future) it is a
repo; for the party on the other end of the transaction, (buying the security and
agreeing to sell in the future) it is a reverse repurchase agreement.
Call Money
Market/Call
Money
Call Money is a money market instrument. A market that consists of the borrowing
of money by brokers and dealers for the purpose of meeting their credit needs.
Along with day-to-day loans, call money loans play a significant role in interbank
money dealings and between banks and money market dealers. Generally these
loans are made on a short term basis.
Monopsony A market dominated by a single buyer.
Moral Hazard One of two main sorts of MARKET FAILURE often associated with the provision
of INSURANCE. The other is ADVERSE SELECTION. Moral hazard means that
people with insurance may take greater risks than they would do without it because
they know they are protected, so the insurer may get more claims than it bargained
for.
Adverse Selection When you do business with people you would be better off avoiding. This is one of
two main sorts of market failure often associated with insurance. Insurance will
often not be profitable when buyers have better information about their risk of
claiming than does the seller.
Multiplier Effect Shorthand for the way in which a change in spending produces an even larger
change in INCOME.
Nash Equilibrium An important concept in GAME THEORY, a Nash equilibrium occurs when each
player is pursuing their best possible strategy in the full knowledge of the strategies
of all other players. Once a Nash equilibrium is reached, nobody has any incentive
to change their strategy. It is named after John Nash, a mathematician and Nobel
prize-winning economist.
Overheating When an economy is growing too fast and its productive CAPACITY cannot keep
up with DEMAND. It often boils over into INFLATION.
Overshooting The common tendency of PRICES in FINANCIAL MARKETS initially to move
further than would seem strictly necessary in response to changes in the
fundamentals that should, in theory, determine value. One reason may be that in the
absence of perfect INFORMATION, investors move in herds, rushing in and out of
markets on rumour.
Pareto Efficiency A situation in which nobody can be made better off without making somebody else
worse off.
Peak Pricing When CAPACITY is fixed and DEMAND varies during a time period, it may
make sense to charge above-AVERAGE PRICES when demand peaks. Because
this will divert some peak demand to cheaper off-peak periods
Permanent Income
Hypothesis
Over their lives, people try to spread their spending more evenly than their
INCOME. What if somebody unexpectedly comes into money, say by winning the
lottery? The permanent income hypothesis suggests that people will save most of
any such WINDFALL GAINS. Reality may be somewhat different.
Pigou Effect A fall in the PRICE level increases the REAL VALUE of peoples SAVINGS,
making them feel wealthier and thus causing them to spend more. This increase in
DEMAND can lead to higher employment.
Price Elasticity A measure of the responsiveness of DEMAND to a change in PRICE. If demand
changes by more than the price has changed, the good is price-elastic. If demand
changes by less than the price, it is price-inelastic.
Prisoners
Dilemma
Favourite example in GAME THEORY, which shows why co-operation is difficult
to achieve even when it is mutually beneficial. Two prisoners have been arrested
for the same offence and are held in different cells. Each has two options: confess,
or say nothing. There are three possible outcomes. One could confess and agree to
testify against the other as state witness, receiving a light sentence while his fellow
prisoner receives a heavy sentence. They can both say nothing and may be lucky
and get light sentences or even be let off, owing to lack of firm evidence. Or they
may both confess and probably get lighter individual sentences than one would
have received had he said nothing and the other had testified against him. The
second outcome would be the best for both prisoners. However, the RISK that the
other might confess and turn state witness is likely to encourage both to confess,
landing both with sentences that they might have avoided had they been able to co-
operate in remaining silent. In an OLIGOPOLY, FIRMS often behave like these
prisoners, not setting PRICES as high as they could do if they only trusted the
other firms not to undercut them. As a result, they are worse off.
Private Equity When a firms SHARES are held privately and not traded in the public markets.
Private equity includes shares in both mature private companies and, as VENTURE
CAPITAL, in newly started businesses. As it is less liquid than publicly traded
EQUITY, investors in private equity expect on average to earn a higher EQUITY
RISK PREMIUM from it.
Progressive
Taxation
TAXATION that takes a larger proportion of a taxpayers INCOME the higher the
income is
Regressive Tax A tax that takes a smaller proportion of INCOME as the taxpayers income rises,
for example, a fixed-rate vehicle tax that eats up a much larger slice of a poor
persons income than a rich persons income.
Random Walk Impossible to predict the next step. EFFICIENT MARKET THEORY says that the
PRICES of many financial ASSETS, such as SHARES, follow a random walk.
Reflation Policies to pump up DEMAND and thus boost the level of economic activity.
Monetarists fear that such policies may simply result in higher INFLATION.
Systemic Risk The RISK of damage being done to the health of the FINANCIAL SYSTEM as a
whole. A constant concern of BANK regulators is that the collapse of a single bank
could bring down the entire financial system. This is why regulators often organise
a rescue when a bank gets into financial difficulties.
Systematic Risk The RISK that remains after DIVERSIFICATION, also known as market risk or
undiversifiable risk. It is systematic risk that determines the RETURN earned on a
well-diversified portfolio of ASSETS.
Residual Risk When you buy an ASSET you become exposed to a bundle of different RISKs.
Many of these risks are not unique to the asset you own but reflect broader
possibilities, such as that the stockmarket average will rise or fall, that INTEREST
rates will be cut or increased, or that the GROWTH rate will change in an entire
economy or industry. Residual risk, also known as alpha, is what is left after you
take out all the other shared risk exposures. Exposure to this risk can be reduced by
DIVERSIFICATION. Contrast with SYSTEMATIC RISK.
Safe Harbour Protection from the rough seas of REGULATION. Laws and regulations often
include a safe harbour clause that sets out the circumstances in which otherwise
regulated FIRMS or individuals can do something without regulatory oversight or
interference.
Says Law SUPPLY creates its own DEMAND. So argued a French economist, Jean-Baptiste
Say, and many classical and neo-classical economists since. KEYNES argued
against Say, making the case for the use of FISCAL POLICY to boost demand if
there is not enough of it to produce FULL EMPLOYMENT.
Creative
Destruction
A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialism
and Democracy" (1942) to denote a "process of industrial mutation that incessantly
revolutionizes the economic structure from within, incessantly destroying the old
one, incessantly creating a new one. Eg. A smaller company eventually taking over
an old behemoth by leveraging its new & efficient processes.
SDR Short for special drawing rights. Created in 1967, the SDR is the IMF's own
currency. Its value is based on a portfolio of widely used currencies. You can think
of SDRs as an artificial currency used by the IMF and defined as a "basket of
national currencies". The IMF uses SDRs for internal accounting purposes. SDRs
are allocated by the IMF to its member countries and are backed by the full faith
and credit of the member countries' governments
Reserve Tranche The proportion of the required quota of currency that each International Monetary
Fund (IMF) member country must provide to the IMF, but can designate for its
own use. The reserve tranche portion of the quota can be accessed by the member
nation at any time, whereas the rest of the member's quota is typically unaccessible.
Because IMF member nations have many different national currencies, the IMF
denominates its members' quotas in terms of special drawing rights (SDRs), which
is essentially a specified basket of major international currencies.
A certain proportion of a member country's quota is specified as its reserve tranche.
The member country can access its reserve tranche funds at its discretion, and is
not under an immediate obligation to repay those funds to the IMF. Member nation
reserve tranches are typically 25% of the member's quota.
Securitization Turning a future cashflow into tradable, BOND-like SECURITIES. Creating such
ASSET-backed securities became a lucrative business for financial FIRMS during
the 1990s, as they invented new securities based on cashflow ranging from future
mortgage and credit-card payments to BANK loans, movie revenue and even the
royalties on songs by David Bowie (so-called Bowie-bonds). Securitisation has
many benefits, at least in-theory. Issuers gain instant access to MONEY for which
they would otherwise have to wait months or years, and they can shed some of the
RISK that their expected revenue will not materialise.
Social Capital The amount of community spirit or trust that an economy has gluing it together.
The more social capital there is, the more productive the economy will be.
Sticky Prices Petrol-pump PRICES do not change every time the oil price changes, and holiday
prices and standard hotel rates are fixed for months. Sticky prices are slow to
change in response to changes in SUPPLY or DEMAND. As a result there is, at
least temporarily, DISEQUILIBRIUM in the market.
Tiger Economies The fast-growing developing economies of Asia, at least before their crisis in the
late 1990s.
Tobin Tax Tobin tax, a (so far unimplemented) proposal to reduce speculative cross-border
flows of CAPITAL by levying a small tax on foreign exchange transactions.
Transfer Pricing The PRICES assumed, for the purposes of calculating tax liability, to have been
charged by one unit of a multinational company when selling to another (foreign)
unit of the same firm. FIRMS spend a fortune on advisers to help them set their
transfer prices so that they minimise their total tax bill. For instance, by charging
low transfer prices from a unit based in a high-tax country that is selling to a unit in
a low-tax country, a firm can record a low PROFIT in the first country and a high
profit in the second.
Transfers Payments that are made without any good or service being received in return.
Much PUBLIC SPENDING goes on transfers, such as pensions and WELFARE
benefits. Private-sector transfers include charitable donations
Unemployment
Forms
Functional unemployment occurs when people change from one job to another &
there is an interval. This can happen even in a situation of full employment.
Structural unemployment happens when jobs exist for qualified persons but the
unemployed do not have the matching qualifications. It also occurs when labour is
available, but factors of production are missing. Basically Indias unemployment is
structural in nature, related to the inadequacy of productive capacity to create
enough jobs for all those willing to work. Not only is the productive capacity much
below the needed quantity, it is also found increasing at a low rate. This type of
unemployment is not a temporary phenomenon. It is chronic & is the result of
backwardness & low rate of economic development
Cyclical unemployment arises out of cycles of recession. The main cause is the
slackness in business activities. This type is generally witnessed in developed
countries.
Seasonal Unemployment: Generally, seasonal unemployment is confined to the
agricultural sector because nature predominates in agriculture. The demand for
agriculture labour increases at the time of sowing & harvesting which provides
employment for 6-8 months and for the remaining period most of the agricultural
workers remain unemployed.
Disguised unemployment is when people are employed but their marginal
productivity is zero i.e. if a part of the labour is withdrawn the total production will
remain unchanged.
Technological Unemployment: When the introduction of new technology causes
displacement of workers, it is called technological unemployment.
Poverty Trap or
Unemployment
Trap
When unemployed people who receive benefits, either from the GOVERNMENT
or from private CHARITY, are deterred from taking a new job because the
reduction or removal of benefit if they do will make them worse off. Also known
as the POVERTY TRAP, it can be addressed, to an extent, by continuing to pay
benefit for a while to unemployed people returning to work.
Vertical Equity One way to keep TAXATION fair. Vertical equity is the principle that people with
a greater ability to pay should hand over more tax to the GOVERNMENT than
those with a lesser ability to pay.
Visible Trade Physical EXPORTS and IMPORTS, such as coal, computer chips and cars. Also
known as merchandise trade. Contrast with INVISIBLE TRADE.
Invisible Trade EXPORTS and IMPORTS of things you cannot touch or see: SERVICES, such as
banking or advertising and other intangibles, such as copyrights. Invisible trade
accounts for a growing slice of the value of world trade.
Wage Drift The difference between basic pay and total earnings. Wage drift consists of things
such as overtime payments, bonuses, PROFIT share and performance-related pay.
It usually increases during periods of strong GROWTH and declines during an
economic downturn.
World Bank An institution created with the IMF at BRETTON WOODS in 1944 and opened in
1946. The World Bank has three main branches: the International Bank for
Reconstruction and Development (IBRD), the International Development Agency
(IDA) and the International Finance Corporation (IFC).
X-efficiency Producing OUTPUT at the minimum possible cost.
Zero Sum Game When the gains made by winners in an economic transaction equal the losses
suffered by the losers. It is identified as a special case in GAME THEORY. Most
economic transactions are in some sense positive-sum games. But in popular
discussion of economic issues, there are often examples of a mistaken zero-sum
mentality, such as PROFIT comes at the expense of WAGES, higher
PRODUCTIVITY means fewer jobs, and IMPORTS mean fewer jobs here.
Yield Curve Shorthand for comparisons of the INTEREST RATE on GOVERNMENT BONDS
of different maturity.
Free Trade Area
vis--vis Common
Market
(UPSC 2006)
Forward Currency
Market
(UPSC 2006)
Offshore Currency
Market
(UPSC 2006)
Agri-Trade
(UPSC 2006)
CEMA Bloc
(UPSC 2006)
Crude Prices
(UPSC)
Gandhian
Economy
(UPSC)
Second Green
Revloution
(UPSC)
Kasturba Gandhi
Balika Vidyalaya
Yojana
(UPSC)
Euro-Control
(UPSC)
Blue tooth
(UPSC)
MFN Status to
India by Pakistan
(UPSC)
The Notion of
development of
Underdevelopment
(UPSC)
Green GDP
(UPSC)
Green Gross Domestic Product (Green GDP) is an index of economic growth with
the environmental consequences of that growth factored in.
Terms of reference
of Abid Hussain
Committee
(UPSC)
Agreement on
Agriculture (AOA)
of WTO
(UPSC)
SLR
CRR
Repo Rate The reverse repo rate is the rate at which banks park their short-term excess
liquidity with the RBI, while the repo rate is the rate at which the RBI pumps in
short-term liquidity into the system
Reverse Repo
Bank Rate
Minimum
Alternate Tax
(UPSC)
CENVAT
MODVAT Scheme
of 1986
(UPSC)
VAT
(UPSC)
Objectives of Plant
Varieties Rights
Act 2002
(UPSC)
How is HDI for
Life Expectancy
measured?
(UPSC)
Objectives of 12
th
Finance
Commission
(UPSC)
The Finance Commission is constituted to define financial relations between the
Center and the States. Under the provision of Article 280 of the constitution, the
President appoints a Finance Commission for the specific purpose of devolution of
non-plan revenue resources. The functions of the Commission are to make
recommendation to President in respect of:
1. The distribution of net proceeds of taxes to be shared between the union and the
states and the allocation of share of such proceeds among the states.
2. The principles which should govern the payment of grant-in-aid by the Center to
States.
3. Any other matter concerning financial relations between the Center and the
States.
Contribution of
Primary,
Secondary &
Tertiary Sector in
Indias GDP
(UPSC)
Objective of SEBI
(UPSC)
Deficit Financing
(UPSC)
Plan Holiday
(UPSC)
When national planning is given a break. During plan holiday, only annual plans
are implemented. The reason is that the state would not be in a position to make
financial commitments for more than a year. Eg. in India it was adopted during
1966-1969 & from 1990-1992.
Competition Act The act provide for establishment of a Commission to prevent practices having
2002
(UPSC)
adverse effect on competition, to promote and sustain competition in markets, to
protect the interests of consumers and to ensure freedom of trade carried.
FRBM Act The revenue deficit as a ratio of GDP should be brought down by 0.5 per cent
every year and eliminated by 2007-08;
The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every
year and brought down to 3 per cent by 2007-08;
The total liabilities of the Union Government should not rise by more than 9
per cent a year;
The Union Government shall not give guarantee to loans raised by PSUs and
State governments for more than 0.5 per cent of GDP in the aggregate;
Buy back of
Shares
(UPSC)
Why was
Janashree Bima
Yojana Introduced
(UPSC)
The scheme provides life insurance protection to the rural and urban poor persons
below poverty line and marginally above the poverty line. The premium under the
scheme is Rs.200/-per annum per member. 50% of the premium i.e. Rs.100/- will
be contributed by the member and/or Nodal Agency/State Government and the
balance 50% will be born by the Social Security Fund.
Agriculture
Insurance
Corporation
Agriculture Insurance Company of India Limited (AIC) has been formed by the
Government of India in 2002-03 to subserve the needs of farmers better and to
move towards a sustainable actuarial regime, it was proposed to set up a new
Corporation for Agriculture Insurance. GIC (35 %) & NABARD (30%) hold 65
% stake in the company
Govt Policy on
Child Labour
Objectives of
National Health
Policy 2002
(UPSC)
Operation
Blackboard
Scheme
The scheme of Operation Blackboard was launched in 1987 in pursuance of
National Policy on Education, to provide minimum essential facilities to all
primary schools in the country. It was formulated with an assumption that the
improvement in school environment would increase the enrolment rate, retention
rate and attainment levels of primary school children.
Differential Rate
of Interest Scheme
(UPSC)
Government of India had formulated in March, 1972 a scheme for extending
financial assistance at concessional rate of interest @ 4% to selected low income
groups for productive endeavours initially by public sector banks and then by
private sector banks also. The scheme known as Differential Rate of Interest
Scheme (DRI) is now being implemented by all Scheduled Commercial Banks.
Major items of
expenditure on
Indias Revenue
Account
(UPSC)
Pradhan Mantri
Gram Sadak
Yojana
(UPSC)
Peak Rate of
Custom Duty
(UPSC)
Union budget 2008-09 has kept it unchanged at 10 %.
OGL Open General License. Being a signatory of WTO, by year 2003, India has to put
most of the items under Open General License (OGL) for import which means
these items can be freely traded.
SEZ
(UPSC)
RBIs Automatic
Route in FDI
(UPSC)
Objectives of
Annapurna
Scheme
(UPSC)
Sampoorna
Gramin Rojzar
Yojana
(UPSC)
Union Budget
2002-03
recommended
some services to be
taxed. Name any 4.
(UPSC)
Dumping
(UPSC)
Capital Account
Convertability
(UPSC)
The Tarapore committee set up by the Reserve Bank of India (RBI) in 1997 to go
into the issue of CAC defined it as the freedom to convert local financial assets into
foreign financial assets and vice versa at market determined rates of exchange.
CAC has 5 basic statements designed as points of action:
1. All types of liquid capital assets must be able to be exchanged freely, between
any two nations, with standardized exchange rates.
2. The amounts must be a significant amount (in excess of $500,000).
3. Capital inflows should be invested in semi-liquid assets, to prevent churning
and excessive outflow.
4. Institutional investors should not use CAC to manipulate fiscal policy or
exchange rates.
5. Excessive inflows and outflows should be buffered by national banks to
provide collateral.
Current Account
Convertibility of
Rupee
(UPSC)
Current account convertibility allows free inflows and outflows for all purposes
other than for capital purposes such as investments and loans. In other words, it
allows residents to make and receive trade-related payments receive dollars (or
any other foreign currency) for export of goods and services and pay dollars for
import of goods and services, make sundry remittances, access foreign currency for
travel, studies abroad, medical treatment and gifts etc. In India, current account
convertibility was established with the acceptance of the obligations under Article
VIII of the IMFs Articles of Agreement in August 1994.
Sex Ratio of India
(UPSC)
Ad Valorem &
Specific Duties
(UPSC)
Zero Based
Bugeting
(UPSC)
Zero-based Budgeting requires that a program be justified from the ground up each
fiscal year. ZBB is especially encouraged for Government budgets because
expenditures can easily run out of control if it is automatically assumed what was
spent last year must be spent this year
CRISIL
(UPSC)
Providing
Industry Status to
Agriculture
(UPSC)
Operation Flood
(UPSC)
Couple Protection
Ratio
(UPSC)
HDI & Gender
Related
Development
Index
(UPSC)
Green GNP
(UPSC)
Hard Currency &
Soft Currency
(UPSC)
Misery Index
(UPSC)
Per Capita Income
(UPSC)
Objectives of
Social Security
(UPSC)
Parallel Economy
(UPSC)
Command Area
Development
(UPSC)
Objectives of
NABARD
(UPSC)
11
th
Finance
Commission
(UPSC)
Census Definition
of Urban Areas
(UPSC)
Objectives of New
Economic Policy of
GoI (UPSC)
Rao-Manmohan
model of
development
(UPSC)
Mid-day Meal
Scheme
(UPSC)
MoU A memorandum of understanding (MOU or MoU) is a document describing a
bilateral or multilateral agreement between parties. It expresses a convergence of
will between the parties, indicating an intended common line of action.
Monetary
Aggregates
M1 - Consists of currency with the public (ie notes & coins in circulation minus
cash with the banks) plus demand deposits with the bank (deposits which can be
withdrawn without notice) plus other deposits with RBI (usually negligible). Also
called narrow money
M2 - M1 + saving deposits + Certificate of Deposits (CDs) + term deposits
maturing within a year.
M3 - M2 + term deposits with maturity more than a year + term borrowing of
banking system. Also known as broad money.
Liquidity
Aggregates
Over & above the monetary aggregates the Reddy Committee also recommended
Liquidity aggregates which includes
L1 M3 + all Deposits with the Post Office Savings Banks (excluding National
Savings Certificates)
L2 L1 + Term Deposits with Term Lending Institutions and Refinancing
Institutions (FIs) + Term Borrowing by FIs+ Certificates of Deposit issued by
Financial Institutions; and
L3 L2 + Public Deposits of Non-Banking Financial Companies
Mode of Services
Under GATT
Mode 1 - Cross border trade, this is defined as delivery of a service from the
territory of one country into the territory of other country. No one actually moves
E.g. Postal Services, Telecom Services.
Mode 2 - Consumption abroad - this mode covers supply of a service of one
country to the service consumer of any other country through temporary relocation
of consumer. E.g. Education abroad, Tourism etc.
Mode 3 - Commercial presence - which covers services provided by a service
supplier of one country in the territory of any other country. E.g. Banks, Hospitals
owned by Foreign Firms.
Mode 4 - Presence of natural persons - which covers services provided by a service
supplier of one country through the presence of natural persons in the territory of
any other country. E.g. Doctors, IT Professionals etc.
Revenue Deficit
(UPSC)
Difference between revenue expenditure & revenue receipts
Budget Deficit Difference between total expenditure & revenue receipts
Fiscal Deficit
(UPSC)
Budget deficit plus non debt creating capital receipts.
Fiscal Deficit = Total Expenditure Revenue Receipts Non Debt Creating
Capital Receipts (E.g. Disinvestment, Recorvery of NPAs, Sale of Assets etc).
Therefore if Total Expenditure is more, it will lead to positive fiscal deficit which
is bad beyond a certain point.
Primary Deficit Fiscal deficit Interest Payments.
Monetized Defict Deficit Financing through printing currency.
Ways & Means
Advances
Vajiram Notes.
Imperative
Planning
Type of planning where the central planning authority decides about every aspect
of the economy and the targets set & the processes delineated to achieve them are
to be strictly followed. This type of planning is mainly practiced in socialist
economies.
Indicative
Planning
A system of planning in which the state sets the broad parameters and goals for the
economy. The state only broadly indicates the targets to be achieved. It was
adopted in India since the 8
th
Five Year plan & is based on the model being
practiced by many developing countries.
Perspective
Planning
It is planning for a long period of time usually 15-20 years. As a highly specialized
tasks it is operationalized through 5 year plans & annual plans.
Rolling Plan Under the technique of rolling plans, there are three plans. First, there is plan for
the current year which includes the annual budget. Second, there is aplan for a
fixed number of years say three or four or five. It is changed every year in keeping
with the requirements of the economy. Third there is a perspective plan for 10, 15
or 20 years.
Millenium Development Goals (MDGs to be achieved by 2015)
1. Eradicate extreme poverty and hunger
2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria, and other diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development
FERA FEMA
Violation of FERA was a criminal offence. Violation of FEMA is a civil wrong.
Offences under FERA were not compoundable. Offences under FEMA are compoundable.
Penalty was 5 times the amount involved. Penalty is 3 times the sum involved.
Citizenship was a criteria to determine residential
status of a person under FERA.
Stay in India for more than 182 days is the
criteria to decide residential status.
There was only one Appellate Authority namely
Foreign Exchange Regulation Appellate Board.
There are two appellate authorities namely
1. Special Director (Appeals) and
2. Appellate Tribunal for Foreign Exchange.
Topics to be covered from here only
SPI Social Progress Indicator which is defined at the individual level in 3
dimentions.
1. Longevity of life
2. Consumption of private goods
3. Access to public goods such as clean water, sanitation, safety, transport
etc
GPI Genuine Progress Indicator. It includes more than 20 aspects of our economic
life that GDP ignores. The value of activities that add to human progress are
added and those which reduce progress are subtracted from the measure. The
later set of activities include crime, defense expenditure, degradation of
resources etc.
Green Index The World Banks environmentally sustainable development division has
developed this index which attached dollar value to each of the below
mentioned components:
1. Produced assets
2. natural resources
3. human resources
It then estimates the true estimate of the countrys wealth taking into account
all such resources which do not always show up on traditional economic
indicator.
Self Sufficiency & Self
Reliance
Self sufficiency refers to a situation where a country would be producing all the
goods it requires. Imports are completely ruled out.
Self reliance is a situation where the country has the capacity to pay for its
imports.
Rupee Payment Area Consists of those countries where rupee was used as a vehicle currency i.e. for
transaction. It includes mainly soviet union countries where the loan is repaid
only through exports & not in terms of payment of cash.
Rupee Debt Is loan raised from rupee payment area countries which has to be serviced
through exports.
Components of
External Debt of
India
1. Multilateral Assistance
2. Bilateral Assistance
3. IMF
4. NRI Deposits (Long Term)
5. Export Credit
6. ECBs
7. Rupee Debt
8. Short Term Debt.
Fiscal Drag A situation where inflation pushes income into higher tax brackets bracket
creep. The result is increase in income taxes but no increase in real purchasing
power. This is a problem during periods of high inflation. Government gains
due to higher tax collections & the economy suffers as growth is dragged down
due to less demand. In high growth & high inflation economies (i.e.
overheated), fiscal drag acts as automatic stabilizer as it acts naturally to keep
the demand stable.
Excise Duty Excise duty is imposed on the manufacturer of excisable products and is levied
on a wide variety of commodities manufactured in India. This duty is an
important source of revenue for the central government. Rates vary depending
on the type of commodity, and even for the same type of commodity the rates
often differ depending on circumstances such as end-use and taxability of
inputs. Although generally ad valorem, the rates may also be specific or a
combination of ad valorem and specific.
Custom Duty Customs duties are levied on commodities imported into India. However,
drawbacks may be available if the imported items are reexported or used in
manufacture for export. Customs duty is also imposed on the value of certain
exports. Customs duties, particularly on imports, may be a significant cost
factor in an Indian project due to the generally high rates of duties, unless
corresponding drawbacks are available upon export.
Bonus & Rights Issue Bonus Issue: An offer of free additional shares to existing shareholders. A
company may decide to distribute further shares as an alternative to increasing
the dividend payout. Also known as a "scrip issue" or "capitalization issue".
New shares are issued to shareholders in proportion to their holdings. For
example, the company may give one bonus share for every five shares held. No
new funds are raised with a bonus issue.
Rights Issue: Issuing rights to a company's existing shareholders to buy a
proportional number of additional securities at a given price (usually at a
discount) within a fixed period. Rights are often transferable, allowing the
holder to sell them on the open market.
Primary Secondary &
Tertiary Sector
Primary Sector
The primary sector of the economy extracts or harvests products from the earth.
Types of industry in the primary sector are:
1. Farming - the production of food
2. Mining mining metals and minerals
3. Fishing catching and gathering food from seas, rivers and lakes
4. Forestry growing and managing forests for wood production
In India, primary sector accounted for 16.6% of the GDP in 2007, employed
60% of the total workforce and despite a steady decline of its share in the GDP,
is still the largest economic sector and plays a significant role in the overall
socio-economic development of India
Secondary Sector:
The secondary sector processes the raw materials from the primary sector. This
means that they take the raw materials and make them into finished items.
Types of industry in the secondary sector are:
1. Food and drink - processing raw foodstuffs, such as making wheat into
bread.
2. Manufacturing cars
3. Building
In India secondary sector accounts for 27.6% of the GDP and employ 17% of
the total workforce.
Tertiary Sector:
The tertiary sector of the economy is the service industry. This sector provides
services to the general population and to businesses. Activities associated with
this sector include retail and wholesale sales, transportation and distribution,
entertainment (movies, television, radio, music, theater, etc.), restaurants,
clerical services, media, tourism, insurance, banking, healthcare, and law.
In India it provides employment to 23% of work force, and it is growing fast,
growth rate 7.5% in 19912000 up from 4.5% in 195180. It has the largest
share in the GDP, accounting for 55% in 2007 up from 15% in 1950.
Informal/Unorganized
Sector in India
For statistical purpose, the informal sector is regarded as a group of production
units, which form part of the household sector as household enterprises or
equivalently, unincorporated enterprises owned by households.
On the other hand the unorganised sector refers to those enterprises whose
activities or collection of data is not regulated under any legal provision or do
not maintain any regular accounts. In the unorganised sector, in addition to the
unincorporated proprieties or partnership enterprises, enterprises run by
cooperative societies, trust, private and limited companies are also covered. The
informal sector can therefore, be considered as a sub-set of the unorganised
sector.
India: About 370 million workers constituting 92% of the total workforce in a
country were employed in the unorganized sector as per NSS Survey 1999-
2000. It plays a vital role in terms of providing employment opportunity to
large segment of the working force in the country and contributes to the
national product significantly. The contribution of the unorganised sector to the
net domestic product and its share in the total NDP at current prices has been
over 60%.
Social Security in
India
Social security primarily refers to social welfare service concerned with social
protection, or protection against socially recognized conditions, including
poverty, old age, disability, unemployment and others.
Constitution on Social Security:
Matters relating to Social Security are listed in the Directive Principles of State
Policy and the subjects in the Concurrent List. The following social security
issues are mentioned in the Concurrent List (List III in the Seventh Schedule of
the Constitution of India)
Item No. 23: Social Security and insurance, employment and unemployment.
Item No. 24: Welfare of Labour including conditions of work, provident funds,
employers liability, workmens compensation, invalidity and old age pension
and maternity benefits.
Part IV Directive Principles of State Policy
Article 41 - Right to work, to education and to public assistance in certain cases
The State shall, within the limits of its economic capacity and development,
make effective provision for securing the right to work, to education and to
public assistance in cases of unemployment, old age, sickness and disablement,
and in other cases of undeserved want.
Article 42 - Provision for just and humane conditions of work and maternity
relief. The State shall make provision for securing just and humane conditions
of work and for maternity relief.
Discuss various schemes of Government:
Footloose Industries Footloose industry is a general term for an industry that can be placed and
located at any location without effect from factors such as resources or
transport. These industries often have spatially fixed costs, which mean that the
costs of the products do not change despite where the product is assembled.
Diamonds and computer chips are some examples of footloose industries.
Buffer Stock The "buffer stock scheme" is an economic term, referring to the use of
commodity storage for economic stabilization. Specifically, commodities are
bought and stored when there is a surplus in the economy and they are sold
from these stores when there are shortages in the economy. The stock of
commodities stored act as a buffer against price volatility. India maintains
buffer stocks of wheat, rice, sugar, edible oil etc to maintain price stability.
Current Position (May 2008): India purchased 20.5 million tonnes of wheat in
2008 from local farmers and is within sight of a record wheat buffer stock this
year. The buffer stock is maintained by Food Corporation of India.
A likely record crop of 76.78 million tonnes in 2008, a result of better seeds
and favourable weather conditions, have helped the government build large
buffer stocks at a time it is battling inflation ruling at 3-year highs.
Depleted buffer stocks forced India to order expensive imports of 7.3 million
tonnes over the last two years.
Edible Oil Position
of India
As of 2008, India consumes around 12.5 million tonnes (mt) of edible oils
annually, but the production is estimated to be just 7.24mt.
Integrated Wasteland
Development
Program
The Integrated Wasteland Development Programme (IWDP) launched in 1989
under the aegis of the National Wasteland Development Board also aimed at
the development of wastelands on watershed basis. Its objective are
1. To facilitate/ attract resources from financial institutions, banks, corporate
bodies including users industries and other entrepreneurs for development of
wastelands in non forest areas belonging to central and state governments,
Panchayats, village communities, private farmers etc.
2. To promote group of farmers belonging to different communities namely,
big, small, marginal and SC/ST for bringing wasteland under productive use.
3. To facilitate production and flow of additional biomass including farm-
forestry products used as raw materials inputs for different types of industries.
4. To facilitate employment generation through land development and other
allied land based and related activities including plantations.
Agri-Export Zones With the objective of promoting greater exports of fresh and processed
agricultural produce from the country the Government of India (GoI) has
announced the creation of Agri Export Zone (AEZ). The scheme is
implemented by the Ministry of Commerce, GoI, through APEDA (the
Agriculture and Processed Food Export Development Authority), New Delhi
the nodal agency for AEZ. The AEZ is expected to give a focus and direction
for exports of key agricultural produce with potential from the country. It
involves a detailed action plan for the development of a specified geographic
area /s for effecting systematically greater exports of a specific produce.
Under the AEZ all aspects of agriculture such as production, research,
development, extension, post harvest management and marketing are addressed
in a focused manner for successful implementation.
Girard Formula Tariff reduction formula in the area of Non Agriculture Market Access that
takes into account the interests of developing countries by incorporating each
countrys average tariff. The Girard Formula is a variation of Swiss Formula.
Inter Corporate
Deposits
Apart from Commercial papers, corporates also have access to another market
called Inter-corporate deposits (ICD) market. An ICD is an unsecured loan
extended by one corporate to another. This market allows fund surplus
corporates to lend to other corporates.
Merchant Banks MBs are those who manage & underwrite new public issues floated by
companies to raise fund from public. They also provide advisory services to
corporate clients on fund raising.
Angel Investor An investor who invests in a business looking for higher return than possible
from traditional investments. They invest their own money unlike a venture
capitalist who invests public money.
NBFC Non Banking Financial Company. NBFCs registered with RBI have been
classified as
(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company (LC)
NBFCs are doing functions akin to that of banks, however there are a few
differences:
(i) a NBFC cannot accept demand deposits;
(ii) it is not a part of the payment and settlement system and as such cannot
issue cheques to its customers; and
(iii) deposit insurance facility is not available for NBFC depositors unlike in
case of banks
NSDL National Securities Depository Limited, the first and largest depository in India,
established in August 1996 and promoted by institutions of national stature
responsible for economic development of the country has since established a
national infrastructure of international standards that handles most of the
securities held and settled in dematerialised form in the Indian capital market
Indonext Promoted by BSE, Federation of Indian Stock Exchanges & the regional stock
exchanges. The BSE IndoNext would help the investors to reach the BSE
IndoNext traded scrips in addition to the network of BSE, also through the
network of about 7,000 members of RSEs, who cater to the investors in the far -
flung areas of the country and, thus, contribute to the development of the
capital market.
Clearing House An organization that registers, monitors, matches & guarantees the trades of its
members & carries out the final settlement of all future transactions. The
National Securities Clearing Corporation is the clearing house for the NSE.
Gilt Gild is a bond issued by the government. It is issued by the central bank of a
country on behalf of the government. In India, RBI issues the treasury bills or
gilts. Gild Edged market is a the market for government securities.
NCDEX National Commodity & Derivatives Exchange Limited is the national level
online multi commodity exchange. It offers futures trading in both agricultural
& non agricultural commodities.
FMC Forward Markets Commission which is the regulatory authority of forward
markets, overseen by he Ministry of Consumer Affairs & Public Distribution.
Primary Dealers RBI introduced system of PDs in government securities market in 1995 with
the objective to strengthen the infrastructure in the government securities
market in order to make it more vibrant, liquid & broad based.
Market Depth It is a dimension of market liquidity & refers to the ability of the market to
handle large trading volumes without significant impact on prices. For example,
if the market for a stock is "deep", there will be a sufficient volume of pending
orders on both the bid and ask side, preventing a large order from significantly
moving the price.
Market Breadth The fraction of overall market that is participating in the markets up or down
move. The great the breadth, the more the companies are participating.
GDP Deflator The GDP deflator is arrived at by dividing the GDP at current prices by GDP at
constant prices in terms of base year prices (1993-94). This indicates how much
growth in GDP is due to price rise & how much due to increase in output.
Asset Stripping Selling surplus land or machinery of an industrial undertaking to convert the
idle or under utilized asset into cash.
Debt Service Ratio Ratio of a countrys debt service (repayment of principle & interest) as a ratio
of its total export earnings.
Free on Board The price of a commodity when it is loaded on to the ship, truck or airplane. It
includes only the cost of production & transport charges upto the port of
embarkation but does not include insurance or freight.
Maastricht
Convergence
Five conditions that prospective members of EU had to meet before they were
allowed entry into European currency union.
Participation Rate The ratio of labour force to the active population aged (15-65).
Transfer Payments Payments made with o expectation of a return of goods or services. E.g. charity,
pension.

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Ghanshyam Thori Economy Notes

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