CA CPT Economics short notes

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Ch 1 – Meaning & Scope of Economics

Economcis – Derived from Greek Word “Oikonomia” means ‘Household’ or ‘Household Management’.

  1. Economics as science of wealth (classical economists )

Adam Smith(Father of Economics)- An inquiry into the Nature and Causes of Wealth of Nations(1776)-At birth called ‘Political Economy’.

 

JB Say– Science which deals with wealth.

    

       Criticism – Materialistic and neglect of welfare

 

  1. Economics as science of material well being (neo classical economists)

Alfred Marshall – welfare aspect of economics -normative aspect – “Economics is on the one side a study of wealth, and on the other and more important side, a part of the study of man”.

Prof. A.C, Pigou – “The range of our enquiry becomes restricted to that part of social welfare which can be brought directly into relationship with measuring rod of money”.

 

 

Criticism – Neglect of immaterial things, concept of welfare vague(unclear)

 

  1. Economics as science of Choice Making

Lionel Robbins:- i. Positive science       ii. Economics is neutral between ends.

Wrote book – Nature and significance of Economics (1931) – gave scientific definition.

“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”.

 

Criticism – Impersonal & colorless, ignored macro-economic concepts, no focus on economic growth and development and problem of abundance (excess of resources e.g. unemployed people)

 

  1. Economics as science of dynamic growth and development

 

Paul A. Samuelson – “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and groups of society”.

 

Prof Henry Smith – “The study of how in a civilized society one obtains the share of what other people have produced and of how the total product of society changes and is determined.”

 

Jacob Viner – “Economics is what economists do”. – Pragmatic (practical) definition

 

  1. Economics as a Science: facts are systematically collected and analyzed – a social science whose subject matter is man – it is an imperfect science.

 

Economics as an Art: It is practice of knowledge. J.M. Keynes – “An art is a system of rules for the attainment of given end.”  It teaches us to do.

 

  1. Positive Science – deals with what is – Simply states facts and uses empirical evidence. It does not offer any kind of suggestion about the facts. Thus, positive science is strictly neutral towards ends – more logical and helps in the formulation of theories.

 

Normative Science – deals with what ought to be – deals with ethics – offers suggestion for solving the problems – more practical, realistic and useful science.

 

  1. Microeconomics – Greek word Mikros means small – deals with behaviour consumers, resource owners, etc – deals with allocation of resources – known as price theory- Partial Equilibrium Analysis

Prof Boulding – “Microeconomics is the study of particular firms, particular households, individual price, wages, income, individual industries and particular commodities”.

 

Macro economics – Aggregative Economics – Method of Lumping – Income Theory – General Equilibrium analysis – deals with aggregates such as national income, aggregate consumption, etc.

Mc Connel – “Macroeconomics examines the forest and not the trees. Thus it analyses and establishes the functional relationship between large aggregates”.

 

  1. Deductive Method – General to particular –more suitable when facts and data are not available – also called as abstract, hypothetical or a priori – based on abstract reasoning – theoretical method.

 

The steps in the process of deductive reasoning are:

(a)Perception of the problem(theory)    (b)Defining terms and making assumptions (developing hypothesis)

(c)Deductive hypothesis (observation)            (d)Testing hypothesis (Confirmation)

 

        Inductive method – Particular to general – popular among modern economists – more precise,  realistic and scientific – more suitable when facts and data are available – also called as historical, concrete, empirical  or realistic.

 

The steps in inductive method are:

(a)Perception of the problem (Observation)                (b)Collection of data (Pattern)             (c)Finding out the relationship (Tentative hypothesis) (d) Set rules for the verification of the principles (Making Theory)

 

Deductive and inductive methods are not alternative of each other.

Marshall – “Both the methods are needed for scientific thought as the right and left foot are both needed for walking”.

 

  1. Central problem – Problem of choice. Three main causes of central problems are

a.Unlimited human wants     b.  Limited economic resources   c. Alternative uses of resources

 

The central problems are:

What to produce and how much to produce? The guiding principal is to allocate the resources in the production of goods in such a way that maximizes aggregate utility.

 

How to produce? (Labour Intensive Technique or Capital Intensive Technique). The choice of technique will depend upon –  availability of various factors of production, and The price of factors of production.

 

For whom to produce? Goods and services produced for people who can pay for them – decide about the shares of different people in the national cake of goods and services. Paying capacity depends upon income or purchasing power.

 

What provision should be made for economic growth?

Take decision about rate of saving, investment, capital formation, etc – how much sacrifice of current consumption is to be done.

 

  1. Production Possibility Curve – shows all possible combination of two goods- also called transformation curve or production boundary or production frontier

 

All points on Production Possibility Curve (PPC) solve the first two problems and
points on a higher PPC solve the problem of economic growth. PPC cannot solve the problem of ‘For whom to produce’.

 

The slope of PPC measures opportunity cost – the slope of PPC is rising – law of increasing marginal opportunity cost –  PPC is concave to origin. If opportunity costs were constant, PPC would be a straight line.

PPC is downward sloping due to Scarce resources. We have to sacrifice one good in order to produce more of the other good.

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11.Three forms of economic organisations:

a.Capitalist economy      b. Socialist economy           c.Mixed economy.

 

Capitalism – Means of production are controlled by private individuals – advocates price mechanism  – Prices are determined by the market forces of demand and supply. – basic aim is profit maximization – consumers free to consume whatever they like.

 

Socialism – Government or public sector owns the factors of production  – the central planning authority decides what, how and for whom to produce – aim is to maximise welfare of the society – consumers consume only those goods which are produced by the government – ensure equitable distribution of income through equality of opportunities.

 

Mixed economy – Public and private sectors exist side by side- Both price mechanism and central planning authority decide what, how and for whom to produce – Price mechanism is curtailed (controlled) through measured like price control, administered prices etc – Planning is done through incentives like concessions, subsidies, etc. and disincentives like high rate of taxes, strict licensing etc.

Important Tit-Bits

  1. The law of scarcity is applicable to the rich and poor countries alike.
  2. Robbins said that economics should be neutral between ends (means positive economics)
  3. Macro economics is also known as aggregate economics
  4. In a free market economy, consumer preference decides the allocation of resources. But due to this not all demands will be met and there will be uneven distribution of income in the society.
  5. In PPF, the points lying on the curve show optimum utilization of resources.
  6. Trade-off on a PPF is the shifting of a producer from one point of production to another point of production. This involves sacrificing one commodity to gain more of another commodity.
  7. The PPF shows full employment production level. So if there is unemployment in an economy, then the economy will operate at a point inside the PPF. If the unemployment is reduced the production will shift towards the PPF and with full employment, it will touch the PPF. Reduction in unemployment doesn’t shift the PPF rightwards.
  8. The best definition of economics would be that deals with human wants and scarce means.
  9. Positive economics tries to explain the relationship between causes and effects of various economic events or situations. Normative economics tries to work out or suggest solutions for those situations (problems)
  10. Capitalist economies – US | Socialist – Finland, China, Denmark | Mixed economies – India
  11. MOC increasing – PPC Concave | MOC decreasing – PPC Convex  | MOC constant – PPC downward straight line
  12. The PPC shows the maximum amount of any good that can be produced with the available resources. It also shows the limited number of combinations possible with the given resources
  13. PPC helps us to understand the problem of scarcity and guides us about the possible combinations of two goods to be produced with limited resources.
  14. If there is no scarcity in the world then there is no need to study economics
  15. Deductive method is based on abstract reasoning, and subsequent verification with facts

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Ch 2 – Theory of Demand and Supply

Unit 1 – Demand

  1. The demand for a commodity is the quantity of the commodity which is demanded at a certain price during any particular period of time.

In economics, demand means effective demand which means there should be desire to own the good, sufficient money to buy it and willingness to spend the money.

 

  1. The determinants of an individual household demand are (i) price of the good (Px), (ii) price of related goods (Pz), (iii) income of the consumers (Y), and (iv) tastes and preferences of the consumers (T).

 

The demand curve slopes downward because of (i) law of diminishing marginal utility (as given by Marshall), (ii) income effect, (iii) substitution effect, and (iv) new consumers creating demand.

The law of demand establishes the relationship between price and quantity demanded of a particular product.

All the determinants (factors) are assumed to remain the same except the price of the commodity while drawing an individual’s demand curve.

3.Exceptions to the law of demand are found in the following cases (i) Giffen goods, (ii) Conspicuous goods or goods of status, (iii) Expectation of a price rise in future, (iv) Demonstration effect, and (v) Emergency.

4.Movement along a demand curve occurs due to changes in the price of the good (P ) itself. Shift of the demand curve occurs due to changes in (i) price of other good (Pz), (ii) income of the consumers (Y) and (Hi) tastes of the consumers (T).

Movement can be expansion or contraction of demand whereas shift can be increase or decrease in demand.

5.Price Elasticity of Demand (Ed) measures percentage change in the quantity demanded of a good due to a percentage change in its price. Therefore, Ed can be calculated as:

Ed  =   

Or = –  .

 

6.The major determinants of price elasticity of demand are:

a.Availability of substitutes     b. Income of the consumers    c.Luxuries versus necessities

d.Position of commodity in a consumer’s budget   e.Number of uses of the commodity   f.Level of price

  1. Consumer habits h. Tied Demand i. Time period

 

7.There are five degrees of Ed:-

1.Perfectly inelastic demand (Ed = 0) – When change in price has no effect on quantity demanded.

2.Inelastic demand (Ed < 1) – When a big change in price leads to less than proportionate change in quantity demanded. (%age change in Q.D. is less than %age change in price)

3.Unitary elastic demand (Ed = 1) – When the percentage change in price is equal to percentage change in quantity demanded. (%age change in Q.D. is equal to %age change in price)

4.Elastic demand (Ed > 1) – When a small change in price leads to more than proportionate change in quantity. (%age change in Q.D. is more than %age change in price)

5.Perfectly elastic demand (Ed = ).

 

The commodity with a low price will generally have low price elasticity

 

8.The three methods of measuring Ed are:

a.Outlay or expenditure method      b.Percentage or proportionate method     c. Geometric (or point) method

 

In the outlay method, the Ed is measured on the basis of change in total expenditure (i.e. P x Q) due to change in the price (i.e.P) of the good. If the price of a good falls and, as a result, total outlay increases then Ed >1; if total outlay remains unchanged, then Ed = 1 and if total outlay falls, then Ed<1.

 

  • In the percentage method, Ed is calculated by the formula:

Ed =  .

 

  • For arc elasticity, the formula is Ed = .

 

In the geometric method, Ed at a point on a linear (straight) demand curve is calculated as:

Ed =

Point elasticity is used in situations where the effect is very small or negligible like a builder offering Rs. 1000 discount on his flats (which are worth lakhs or crores)

 

Income Elasticity of Demand measures changes in quantity demanded due to change in income of the consumer.

The formula for Calculating ey is:

Ey .

Income elasticity can be positive or negative, when ey>1, the good is a luxury; when 0<ey<1,it is a necessity; and when ey<0, the good is an inferior good.

 

Cross-Elasticity of Demand It measures changes in the quantity demanded of good x due to change in price of good z. the formula for calculating exz is:

Exz =  .

The value of cross elasticity ranges from minus infinity to plus infinity

When eyz = + , x and z are perfect substitutes

When eyz = 0, x and z are not related

When eyz = – ,x and z are perfect complements.

Unit 2 – Consumer Behaviour

1.Consumer Behaviour

The logical basis of consumer behaviour has been explained by different theories. Some of the most important theories of consumer behaviour are:

  1. Marshall’s Marginal Utility Theory
  2. Hicks and Allen’s Indifference Curve Theory.

 

2.Marginal Utility Theory

Utility means ‘want satisfying power’ of a commodity.

 

Law of diminishing marginal utility – more units consumed – marginal utility falls.

When TU is maximum, MU is zero. It is called saturation point.

When TU is rising, MU is falling. When MU is negative, TU is falling.

 

3.The law of DMU is based on the assumptions that:

a.Standard unit of measurement is used    b.All units of the good are homogeneous  c.Consumption is continuous     d.Mental and social condition of the consumer is normal.

 

Law of DMU – additional benefit goes on decreasing with consumption of each successive unit.

 

Limitations of law of DMU – homogeneous units, standard unit of consumption, no time gap, prestigious goods not included, affected by the availability status of related goods.

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4.Conditions of the theory of MU:

a.Cardinality (utility can be measured)  b.Constant marginal utility of money   c. The hypothesis (theory) of independent utility ( the good should have independent utility like ice cream, and not sugar which is not consumed alone or independently )

 

Cardinality means utility can be measured in numeric values. Rationality means the consumer is assumed to be capable of deciding his good or bad before purchasing any commodity.

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5.Marshall’s consumer surplus

The amount consumer is willing to pay (-) minus the amount he actually pays. It means the area between the demand curve and the price axis above the price. Main limitations of this concept are:

  • Utility or satisfaction cannot be measured in money units.
  • It is difficult to clearly define the amount consumer is willing to pay.

Usefulness of the concept is observed in discriminating monopoly and taxation policy.

 

6.Indifference Curve Theory

Indifference curve shows different combinations of goods that yield the same level of satisfaction to the consumer

 

7.Assumptions of the theory are:

a.Rationality  (ability to differentiate between good and bad)   b.Ordinality  (utility can’t be measured)   c.Diminishing marginal return of substitution    d. Consistency and transitivity of choice    e. More is better

Here Ordinality means that consumer cannot measure precisely utility or satisfaction but he is capable of comparing and ranking satisfaction derived from various goods and their combinations.  Dimnishing MRS means that as more and more units of ‘Y’ commodity are substituted for ‘X’ commodity, the consumer will sacrifice lesser and lesser units of ‘Y’ for each additional unit  of ‘X’.

8.Features of indifference curve are:

a.Downward sloping to the right    b.Convex to the origin    c. They are non-intersecting. d. Higher IC gives higher satisfaction.

  1. IC never touch the axis

 

9.Budget line shows all the possible combinations of the two goods that can be bought by a consumer given income and prices of goods.

Slope of the budget line is the price ratio, i.e.,  Slope of an indifference curve is called Marginal Rate of Substitution (MRSxy).

A consumer is in equilibrium when he maximises his utility, given income and prices. Equilibrium is reached at the point of tangency between indifference curve and budget line. Consumer equilibrium conditions are:

MRSXY =

 

Or                   =                     …(1) And              Diminishing MRS …(2)

 

Perfect substitutes – IC is straight downward sloping line.  Perfect complements – IC is L-shaped.

 

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Unit 3 – Supply

1.Supply

Supply of a commodity at a given price is the quantity of the commodity which is actually offered for sale per unit of time.

2.Factors affecting supply of a good are:

a.Price of the good    b. Price of related goods   c. Cost of production   d. State of technology

  1. Expected price of the good f. Government policy.

 

3.Movement along a supply curve occurs due to changes in the price of good (Px) itself. Shift of the supply curve occurs due to changes in Pz T, G, C, Ex or Gp. Movement can be expansion (extension) or contraction of supply whereas shift can be increase or decrease in supply.

 

4.The concept of Elasticity of supply (Es) was developed by Marshall. Elasticity of supply is defined as the responsiveness of quantity supplied of a good to changes in its own price. Symbolically,

Es  = +  .

5.There are five degrees of Es

a.Perfectly inelastic supply (Es = 0)    b. Inelastic supply (E < 1)   c.Unitary elastic supply (Es = 1)

  1. Elastic supply (1 < E) e. Perfectly elastic supply (Es = ).

For point elasticity there is no change in the formula. For arc elasticity the formula is modified as:

Es =  ×

 

The rule is if the supply curve passes through the point of origin, Es is equal to unity; if the supply curve intercepts the X-axis, Es is less than unity; and if supply curve intercepts the Y axis, Es is greater than unity.

 

Important Tit-Bits

  1. The consumer is in equilibrium at a point where the budget line is tangent to an indifference curve.
  2. The indifference curves are parallel which shows that higher IC gives higher satisfaction and no two ICs intersect each other.
  3. The slope of indifference curve shows diminishing marginal rate of substitution between two commodities.
  4. In the case of giffen (inferior) goods, the demand curve will be upwards-sloping to the right.
  5. TU is maximum when MU is zero.
  6. If the demand for a good is inelastic, an increase in its price will cause the total expenditure to rise (bcos expenditure is equal to P x Q )
  7. If the quantity demanded remains unchanged in spite of change in its price then the elasticity is said to be perfectly inelastic and the demand curve will be vertical.
  8. A decrease in price will result in an increase in the total revenue of a firm for a particular product if the price elasticity (expenditure method) is greater than one. As we know that the expenditure of a consumer is equal to the total revenue for a firm.
  9. Consumer surplus can be defined as the difference between the maximum amount a consumer is ready to pay for a product and the actual price he pays. E.g. if you are ready to pay Rs. 1000 for a product but you are able to buy that product for Rs. 850, then Rs. 150 is your consumer surplus (assumed profit).
  10. Consumer surplus can also be described as Extra Utility.
  11. Consumer has infinite consumer surplus on the first unit of consumption and zero consumer surplus on the last unit of consumption as he has nothing to pay for the last unit.
  12. In cpt exam, more preference is given to the arc method of measuring elasticity.
  13. If there is an increase in both the number of consumers and sellers of a particular commodity, then as a result both the demand and price of that commodity will rise.
  14. Competitive and substitute goods are one and the same thing.
  15. The main aim of a consumer in allocating his income is to maximize his utility.
  16. If demand of a product is more than its supply, the pressure on its price will be upwards ( means price will rise as D > S)
  17. Under ordinal approach, when a consumer’s income rises, his equilibrium point rises and moves to a higher indifference curve.
  18. The elasticity of substitution between two substitutes goods is positive, between two perfect substitutes is infinity, between two complimentary goods is negative and it is zero between two unrelated goods.
  19. The concept of price elasticity of demand was developed by Alfred Marshall.
  20. If the income of a consumer is given then the slope of the price line will be determined by ratio of prices of both the goods. It means the price line will depend upon the portion of consumer’s income spent on the two goods taken into consideration.
  21. If income of the consumer changes, then his price line will also change because with change in income, his spending pattern will also change.
  22. The value of coefficient of price elasticity varies between zero and Infinity.
  23. ‘Ceteris paribus’ term means ‘all other things remaining the same’.
  24. Joint demand and complementary goods are two points of same concept.
  25. In short period demand and supply are less elastic because there is very less time to adjust. In long period both can become more elastic.
  26. The demand curve becomes a rectangular hyperbola when the price elasticity is unitary ( it is equal to 1)
  27. Under cardinal approach, the market price of a commodity is determined by its marginal utility because a consumer changes his demand for that product due to marginal utility.
  28. Cross demand can be defined as the change in the demand of one commodity due to a change in the price of the other commodity.
  29. The ‘L’ Shaped Indifference curve shows the relationship of complementary goods. Because there is a positive relation between the quantities of both the complementary goods e.g. pen & ink. If one is used more then the other is also demanded more.
  30. The budget line shows various combinations obtained by spending a particular amount of money on two goods. These points show equal expenditure but in different proportion.
  31. If we consider the relationship between slope of demand curve and its corresponding elasticity, then the downward sloping demand curve does not have uniform elasticity at different points (refer geometric method of Ed of point elasticity method). It is applicable in point elasticity only.
  32. The demand curve for giffen goods is positive sloped but sometimes it may happen that a particular giffen good is giffen for only a small section of society so in that case its demand curve will be negative (downward sloping) for some and upward sloping for the others.
  33. The income-demand curve for inferior goods always slopes backwards to the left as with a rise in income lesser inferior goods will be demanded. Whereas, The income-demand curve for luxury goods always slopes upwards to the right originating from the origin. This is because more luxury goods will be demanded with rise in income.
  34. Any straight line supply curve passing through origin has unitary elasticity of supply. The slope of the supply curve doesn’t matter in this case.
  35. Any straight line supply curve passing through the price axis ( Y axis) and having a positive slope (upward towards right slope) has elasticity greater than one.
  36. Any straight line supply curve passing through the quantity axis ( X axis) and having a positive slope (upward towards right slope) has elasticity less than one.
  37. Marginal utility of each commodity is measurable in terms of price of the commodity. But practically, it may or may not be equal to the price paid for the last unit of the commodity purchased.
  38. Supply of a commodity rises with an increase in its price all other things remaining constant.
  39. Supply and Demand of a commodity are flow concept.
  40. If two goods are perfect substitutes then they will have a linear indifference curve as the MRS between those two goods is constant (it is infinite always!).

 

Ch 3 – Theory of Production & Cost

Unit 1 – Theory of Production

 

1.Man cannot create or destroy matter.

 

2.James Bates and J.R. Parkinson – Production an organized activity – Objective is to satisfy the demand.

 

Production means creation of economic utilities which can be form utility (changing the form of raw materials into finished products), time utility (making things available when and where they are required), personal utility (providing personal service by professionals like doctors, lawyers etc. also known as service utility) and place utility (transporting goods from one place to another) from the existing matter.

 

3.There are four factors of production namely, land, labour, capital and organization.

 

  1. Land

Land is a primary factor which includes besides physical territory, all natural resources such as water, soil, climate, wind, sea, mineral deposits, forest etc.

 

Features of land are:

a.Its supply is perfectly inelastic    b. It is a free gift of nature    c. It is imperishable.

  1. It is immobile e. It is a passive factor f. It is heterogeneous (varies in fertility).

 

Ricardo – The production power of soil is indestructible

 

  1. Labour

Labour is any physical or mental exertion undertaken to create or produce goods or services in exchange for some monetary reward.

 

Features of labour are:

a.It is perishable    b. It is an active factor    c. It is inseparable from a labourer

  1. Labour is a man, not a machine e. He sells his services and not himself
  2. It is difficult to calculate cost of labour g. All labourers are not equally efficient
  3. Supply curve of labour is backward bending i. Labour is mobile j. Has weak bargaining power

 

  1. Capital

Capital is defined as man-made stock of goods like factories, machines, tools, raw materials, dams, canals, transport vehicles etc. that are used for further production of wealth. Hence, Capital can be termed as ‘ produced means of production’ or ‘man made instrument of production.

 

Capital is a stock concept  – it yields periodical income which is a flow concept

 

Capital formation or investment is defined as the surplus of production over consumption in an accounting year which is further used for production.

Significance of capital formation lies in the following points:

a.It determines the growth rate of an economy   b. It increases production   c. It raises productive capacity

  1. It raises employment opportunities

 

All Capital is wealth but all wealth is not Capital

 

4.The main features of Capital are:-

a.It is man made   b.  It is productive    c.  Supply of capital is elastic    d.  all capital is wealth

  1. it is a passive factor ( you have to use it to some productive purpose) f. it is the most mobile factor
  2. Capital is durable h. Capital involves social cost (to create capital you often sacrifice your current needs)

 

5.Types of Capital (On various basis):-

Durability Mobility Nature Ownership
Fixed Capital

Circulating Capital

Sunk Capital

Floating Capital

Real, Human, Tangible, Intangible, Money Individual Capital

Social Capital

Fixed – Durable physical assets like machinery, tools etc.

Circulating – Working capital which is used once to produce goods and then again gets circulated into the production process after sales are done.

Sunk – Capital which is used to produce only one single commodity. E.g. a brick kiln can be used to make only bricks and nothing else.

Floating – Capital that can be put to several uses like electricity, leather, money etc.

Real – Physical capital goods like machinery, factory building etc.

Human – The people who are equipped with education, skills etc working for the company

Tangible – Goods that can be touched or seen like machinery, building, stock etc. It is like real capital only.

Intangible – It cannot be touched. It can only be felt. E.g. Goodwill.

Money – Capital in the form of shares, debentures, bonds stock certificates etc.

Individual – Capital resources having personal or private ownership like Reliance, Birla, Tata etc.

Social – Capital which is jointly owned by the society as a whole e.g. roads, railways, schools, dams etc.

 

  1. Capital Formation means increase in the stock of real capital or production of more capital goods or further investment in the business.

 

There are three stages of capital formation which should be systematically linked. These are:

Stage I: Creation of Savings – People save from their earnings.

Stage II : Mobilization of Savings – The savings is channelized into the economy through stock market, insurance etc.

Stage III: Investment of Savings – the savings is finally invested into capital assets like machinery, tools etc.

 

Creation of Savings depends upon one’s ability to save and willingness to save. Savings can be Voluntary savings or Compulsory savings (e.g. PPF)

 

In Investment stage the prospective rate of profit ( also called Marginal Efficiency of Capital) and the rate of interest affect the investment decisions.

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7.Entrepreneur

Entrepreneur is the person who organizes, manages and coordinates all factors of production.

 

Functions of an entrepreneur are: Initiating a business enterprise and resource coordinator, To take advantage of changes in a dynamic economy, To bring about innovations, To bear uncertainties

Prof. Joseph A. Schumpeter considers innovation as the true function of the entrepreneur.

Prof. F. H. Knight defined the risk as of two types – foreseeable or insurable risks (fire, thefts etc.) and unforeseeable or non-insurable risks (technological, fashion, trade cycles, govt. policies etc.)

 

8.Production function

It is the process of getting the maximum output from a given quantity of inputs in a particular time period.

Richard H. Leftwich – physical relationship of input and output per unit of time.

 

9.Cobb-Douglas Production designed by Paul H. Douglas and C.W. Cobb of U.S.A.

Q = KLaC(1-a)

Q- output, L – Quantity of labour, C – quantity of capital, ‘K’ and ‘a’ are positive constants.

Main Conclusion – Labour contributed 3/4th and Capital 1/4th.

 

10.Law of variable proportions

The three concepts of production are total, average and marginal product. Total product is total quantity of goods produced by a firm with the given inputs, during a specified period of time.

Average product is the amount of output per unit of the variable factor employed. Marginal product is the change in total product resulting from the employment of one more unit of variable factor.

 

Relationship

When MP is rising – TP rises at an increasing rate, When MP is falling but positive – TP rises at a decreasing rate, MP is zero – TP maximum and  when MP is negative – TP starts falling.

When AP is rising, MP > AP.   When AP is at its maximum, MP = AP.   When AP is falling, MP < AP.

Samuelson – MP declines as TP increases

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11.Law of Returns to Scale

It is a long-run law. It states that ‘when all factors of production are increased in the same proportion, output will increase, but the increase may be at an increasing rate or constant rate or decreasing rate’.

The three stages of law of returns to scale are increasing, constant and decreasing.

Reason behind increasing returns is economies of scale which can be internal or external. Reason behind decreasing returns are diseconomies of scale which can also be internal or external.

 

Internal – Technical, Managerial, Commercial, Financial, risk-bearing

External – Raw material & Capital Equipments, Technological, Development of skilled labour, ancillary industries, transportation and marketing facilities.

 

Unit 2 – Cost

1.Cost

Cost theory helps to determine the supply curve, which together with the demand curve, determines equilibrium price and quantity.

2.Opportunity Cost vs. Outlay Cost

Opportunity cost is defined as the cost of alternative opportunity given up or forgone. It. is also called alternative cost or transfer earnings. Outlay cost is actual expenditure of firms.

3.Explicit Cost vs. Implicit Cost

Explicit cost is the actual money expenditure incurred by a firm in the production process. It is also called direct cost or money cost or out-of-pocket cost. It is not recorded in the books of accounts.

 

Implicit cost is the cost of factors owned by the firm and used by the firm in its own production process. It is also called imputed cost or notional cost or opportunity cost. It is not recorded in the books of accounts.

4.Direct Cost vs. Indirect Cost

Direct cost can be traced to a particular product. Indirect cost cannot be traced to a particular product.

5.Accounting Cost vs. Economic Cost

Accounting costs are explicit cost or actual cash payments. Economic cost is accounting cost plus implicit cost.

 

Short-Run Cost Curves

Total Cost is inverse S-shaped starting from the level of fixed cost.

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6.Average Cost

AFC, is fixed cost per unit of output produced. It is a rectangular hyperbola.

AVC is variable cost per unit of output produced. It is U-shaped due to law of variable proportion.

AC is also called average total cost (ATC). It can be obtained in two ways:

(i) AC= . It gives U-shaped AC curve. The reason behind its shape is the law of variable proportions.

(ii)AC = AFC + AVC.

By aggregating AFC and AVC values we get U-shaped AC curve. The minimum point of AC curve will always occur to the right of the minimum point of the AVC curve.

 

7.Marginal Cost

MC is addition made to TC (or TVC) when one more unit of output is produced.

MC=. MC is the slope of the TC curve at each and every point. MC curve is U-shaped reflecting the law of variable proportions.

 

8.Relationship between AC and MC

Both AC and MC curves are derived from TC curve, since AC =  and MC =

Both AC and MC curves are U-shaped reflecting the law of variable proportions.

When AC is failing, MC is below it.

When AC is rising, MC is above it.

When AC is neither falling nor rising, MC=AC.

There is a range over which AC is falling and MC is rising.

MC curve cuts the AC curve at its minimum point.

 

9.Long run average Cost (LAC) curve is an enveloping curve. It envelopes infinite short run AC curves. LACs are also known as ‘Planning Curves’ and SACs are also called ‘Plant Curves’.  Each point on LAC gives the minimum cost per unit of producing the desired level of output.  The LAC is the least-cost combination for any particular output level.

The falling part of LAC signifies diminishing costs and hence high productivity which may arise due to economies of scale. The Rising portion of LAC signifies increasing costs which arise due to diseconomies of scale.

 

Large outputs can be economically produced i.e. at lowest cost with the bigger plants and small output can be economically produced i.e. at lowest cost with smaller plants.

Important Tit-Bits

  1. The rate and volume of Savings can also be affected by the State (Government).
  2. Diminishing marginal returns means that the marginal cost is rising.
  3. In short run, at least one factor is fixed and the firms are unable to either leave or enter the industry.
  4. In relationship of MP, TP and AP ; it can never happen that when MP is maximum then AP is equal to MP.
  5. The law of diminishing returns to factor applies only to the short run.
  6. Implicit cost generally has opportunity cost as its main constituent as it is often difficult to measure other implicit costs like pain, discomfort etc of the entrepreneur.
  7. In short run suppose output increases then it will result in an increase in Total Cost because variable cost increases.
  8. The falling portion (negatively sloped part) of Long run average cost curve occurs due to economies of scale which is a result of specialization. It implies a decrease in the overall costs of a firm.
  9. The rising portion of LAC occurs due to dis-economies of scale.
  10. Law of production does not include least cost combination of factors. It means it is not necessary that the cost being shown by the production function will be the lowest cost of production.
  11. Mathematically speaking, Marginal Product is the slope of Total Product. (As it is directly associated with TP).
  12. If MP = AP , it means AP is constant and maximum.
  13. When MC is below AC then AC must be falling.
  14. In long run, if a small factory tries to expand, initially it will enjoy economies to scale means increasing returns to scale.
  15. In short run MC changes due to TVC
  16. Capital refers to the produced means of production. (it is man-made).
  17. Return to scale operates when the quantities of all inputs are changed.
  18. Constant returns to scale will be exhibited when a proportional change in input combinations causes proportionate change in output.
  19. Opportunity cost is the cost associated with the opportunity forgone (sacrificed). It means that it the cost which has to be incurred to retain a factor of production in its present use.
  20. AFC does not touch the output axis as TFC can’t be zero so AFC also can’t be zero.
  21. The production function shows the relation between the physical inputs and physical outputs.
  22. When MR rises TR can never fall as TR = MR
  23. In Economics, the concept of MC has a lot of importance in the equilibrium analysis and overall economic analysis.
  24. The optimum output level is where the AC is minimum.
  25. Normally MC is shown as ‘U’ shaped but if MC has to be shown with TC curve then it will be drawn as slope of a tangent to the TC curve at any given output.
  26. An entrepreneur would like to cover all costs of production in order to stay in the business in the long run. But in short run he will continue as long as he is able to recover the variable costs ( remember shut down point! )
  27. Under normal circumstances the LAC curve is influenced by economies and diseconomies of scale.
  28. LAC curve is also called the envelop curve as it covers many SAC curves. But the point of coincidence of LAC curve with each SAC curve is different.
  29. AFC curve is of the shape of rectangular hyperbola.
  30. A firm making normal profit (AC = AR) is often called Marginal Firm.
  31. Minimum MC occurs where MP is maximum.
  32. A firm producing at the minimum point of AC curve is said to be making optimum utilization of plant capacity and is producing at break-even point.
  33. The cost associated with those factors of production which are neither hired nor purchased by the firm is called implicit cost as they are owned by the entrepreneur.
  34. The point which shows the maximum MP drawn in relation to the TP is the point of inflexion. (see law of variable proportion).
  35. The point at which the MP=0 is when TP is maximum and this point is called Saturation Point.
  36. According to law of variable proportion, 2nd stage of the law is most relevant for a firm which aims at maximum economic efficiency as in this stage the production reaches its maximum point (TP is maximum in this stage).
  37. The MP of any factor of production in short run can be positive, zero or negative (see law of variable proportion).
  38. Generally the profits are maximized in short run at the point at which marginal cost of production equals the Marginal Revenue of the firm. (MC = MR Approach).
  39. Both MC and AC are equal only when AC is minimum.
  40. The point on which the long run average cost is minimum and the short run average cost is also minimum occurs only in the long run. In short run, LAC is not considered.

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Ch 4 – Price Determination in Different Markets

Unit 1 – Types of Markets

 

1.A market is a complex set of activity by which potential buyers and sellers interact to determine the price and quantity of a good or service.

 

2.Elements of Market – covers a region, buyers and sellers, a product or service, Bargaining of price, knowledge of various facts, one single price of a commodity at a point of time.

 

  1. Classification of Market:-
  2. Area – Local, Regional, National, International
  3. Time – Very short period market, short period, long period, very long period or secular period
  4. Transactions – Spot, Future
  5. Regulation – Regulated, Unregulated
  6. Volume – Wholesale, Retail
  7. Competition – Perfect competition, Monopolistic Competition, Monopoly, Oligopoly.

 

Alfred Marshall conceived the ‘Time’ element in marketing

 

  1. Revenue is the money payment received by a firm from the sale of a commodity.

TR = PxQ.

AR—It is revenue per unit of output sold and is always equal to price, i.e, AR = P.

MR—It is addition made to TR when one more unit of output is sold. It is given as

 

MR=     or   MRn = TRn – TRn-1   or   MR = AR*

If e=1, MR=0  (TR is maximum)

If e>1, MR will be positive i.e. MR>0  (TR is rising)

If e<1, MR will be negative i.e. MR<0 (TR is falling)

 

5.There are two basic principles governing all market conditions, firms should produce only if:

TR>TVC, MR = MC and slope of MC > slope of MR.

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Unit 2 – Determination of Price

 

Equilibrium means a state of balance or rest.

Equilibrium price is that price at which demand and supply equals each other.

 

  1. Marshall compared demand and supply with the two blades of scissors.

 

  1. Shifts in demand and supply curves takes place due to changes in factors other than the price of the commodity.

 

  1. A change in demand, supply remaining constant, leads to a change in the equilibrium price. If demand increases, both equilibrium price and quantity will rise. If demand decreases, both equilibrium price and quantity will fall.

 

  1. A change in supply, demand remaining constant, leads to a change in the equilibrium price and quantity. If supply increases, price will fall and quantity will rise and vice versa if supply decreases.

 

If both demand and supply change, the new equilibrium price may rise, fall or remain constant

If demand and supply increase in the same proportion then price will remain constant and quantity will rise.

If demand increased is more than the increase in supply, then both the price and quantity will rise.

If demand increased is less than the increase in supply, then price will fall while quantity demanded will rise.

 

Unit 3 – Market Forms

 

  1. Perfect Competition

 

Features of Perfect Competition:- Large number of buyers and sellers, homogeneous products, free entry and exit of the firms from the markets, perfect knowledge of the market, perfect mobility, no transport cost, no selling cost.

 

Under perfect competition, P=d=AR-MR – a firm is a price taker and industry is price maker.

 

In the short run, firm is in equilibrium when MR=MC and slope of MC>slope of MR i.e. MC should cut the MR from below.

 

In the short run three situations can take place depending only upon the price, which is given to the firm.

Supernormal profits, when price is above SAC.

Normal Profit (Break-even point), when price line passes through the minimum point of SAC curve.

Super Normal Losses-  when price line passes below the SAC curve. It will be called  (Shutdown point) when the

price line passes through the minimum point of the AVC curve.

 

In the long run, the perfect competitive firm will only earn normal profit due to free entry and free exit of firms in the market.

 

Total losses minimized is a situation when price line passes from anywhere in between AVC and SAC curves.

 

In a competitive firm, the MC curve of the firm is also its supply curve.

 

  1. Monopoly ( Mono – Single ; Poly – Seller )

 

Causes of monopoly are: control of resources of raw materials, control of process of production, economies of scale and legal barriers, patent rights, business associations or Cartels.

 

Features of Monopoly:- single seller, large number of buyers, no close substitutes, restrictions to entry for new firms, price maker, AR curve is the demand curve.

 

Relationship between AR and MR in monopoly:-

  1. AR and MR are both negatively sloped curves
  2. MR curve lies half way between the AR curve and the Y-axis
  3. AR cannot be zero i.e. AR curve cannot touch X-axis
  4. MR can be zero or even negative i.e. MR curve can touch or cut the X-axis.

 

Aim of the monopoly firm is to maximise profits. It can be attained in two ways just like under perfect competition, i.e.,.

The difference between TR and TC is maximum.

MR = MC and slope of MC>slope of MR.

 

In the short-run, three situations can take place.

  1. Supernormal profits, when AR is above SAC.
  2. Break –even point, when AR=SAC.
  3. Losses, when SAC is above AR.

 

In the long-run, A firm may continue to enjoy supernormal profits.

 

Pricing Under Discriminating Monopoly

Discriminating monopoly is a situation where the monopolist charges different prices for the same commodity from different consumers, at the same times.

 

Conditions necessary for price discrimination are:

  1. There should be some form of imperfect competition present in the markets.
  2. The should be two or more markets.
  3. Elasticity of demand should be different in these markets.
  4. There should be no contact among buyers in these markets.
  5. Monopolist must completely control the supply.

 

  1. Monopolistic Competition

 

Product differentiation can be real or artificial. It introduces an element of monopoly competition and give rise to a negatively sloping, highly elastic demand curve.

 

Non-Price competition is prevalent in the market.

A monopolistic competitive firm is a price maker of its own product.

 

Selling cost is the cost of changing consumer wants. It includes advertising, window displays, demonstrations, etc. It shifts the demand curve (demand increase) and make it inelastic.

Equilibrium takes place where profits are maximum.

 

In the short run, three situations are possible:

Abnormal Profits when AR curve is above SAC curve.

Break –even point, when AR=SAC.

Losses, when SAC curve is above AR curve.

 

In the long-run, due to free entry and exit, adjustment will take place and only normal profits will be earned. All firms will break-even. It means there exists ‘excess capacity’ in monopolistic competition.

 

 

  1. Oligopoly ( Oligo – Few ; Poly – Seller )

 

Oligopoly can be pure or differentiated.

 

Characteristics of Oligopoly – Interdependence among firms while fixing prices and output, great importance is given to advertisement and selling costs, there is an indeterminate Demand curve, existence of Group behavior.

 

Factors causing oligopoly are huge capital investment, absolute cost advantage, product differentiation, economies of scale and mergers.

 

The demand curve is not defined as there are action-reaction patterns among firms. Here  is no general theory under oligopoly. Many different models exist.

 

One such model is – Sweezy’s Kinked demand curve model. It is based on the assumption that firms match price cuts but not price rises. It rationalizes price rigidity in oligopolistic market. It shows that even if cost changes, prices charged for the commodity does not change.

Important Tit-Bits

  1. The kinked demand curve tries to depict the problem of price rigidity faced by a firm.
  2. In all types of market conditions, the level of profit maximization is MR=MC
  3. In all types of market conditions, the AR curve is known as Demand Curve.
  4. The most basic difference between Monopolistic Competition and Perfect competition is that in the former the seller can sell heterogeneous (differentiated) products and in the latter the sellers sell homogeneous (similar) products.
  5. Durable goods can be sold in National market as their life is longer.
  6. Stock Market is an example best suited as Regulated market as it is governed by SEBI.
  7. Pure Oligopoly means that kind of oligopoly market which sells homogeneous products.
  8. Partial Oligopoly is that kind of oligopoly market which is dominated by one big firm and it is considered the leader of the industry or group.
  9. Price discrimination done by a Monopolist can be based on time, size of market, income, elasticity etc.
  10. In Monopolistic competition, sale of branded articles is a common practice undertaken by firms to showcase their products as differentiated products and thus charge higher from the customers. Hence, we can say it is that market form where many firms sell similar products but under different brands.
  11. If there is a fall in the demand for the product in the above market then it will result in fall in price leading to decrease in the number of firms operating in the market further leading to declined production in each firm.
  12. The demand curve for a monopolist firm will be downward sloping as it has to lower the prices in order to sell more.
  13. Marshall assumed the condition of perfect competition while analyzing the concept of consumer’s surplus.
  14. Total profit is equal to TR-TC. So, Average Profit is equal to AR-AC. (difference).
  15. In monopoly, the AR curve is always above the MR curve while both are downward sloping.
  16. In short run a firm will try to survive in the market even if it is able to cover only AVC. But in long run, firm will always want to cover ATC otherwise it may leave the market. So it means if in short run TR<TVC (which means AR < AVC ), then the firm will tend to close down instead of facing losses.
  17. In short run a firm’s most efficient output level will be where AC is minimum and its most profitable point will be where MC=MR.
  18. Generally, under Monopoly and Imperfect competition MC is less than its price which enables the firms to earn supernormal profit.
  19. If an individual firm’s demand curve is coinciding with market demand curve then the prevailing market situation is Monopoly.
  20. A monopolist firm practicing price discrimination in two separate markets will achieve profit maximization when the MR from both the markets will be equal to the MC of both the markets.
  21. A monopolist firm will always try to achieve equilibrium above the middle point of the AR curve as beyond that the elasticity becomes less than one and MR becomes negative (See diagram of relationship between MR, TR and AR given in the book).
  22. If a monopolist firm is enjoying MR > MC then in order to attract more customers it can afford to cut prices it has the margin till MR becomes equal to MC.
  23. If there is competitive equilibrium prevailing in the market then the sellers will be forced to produce at their minimum costs otherwise they could be thrown out of the market.
  24. In short run, if more and more firms enter competitive market then the supply curve of the industry will shift upward as more sellers will lead to more supply. (though this may lead to a decrease in price)
  25. In perfect competition the industry will be in equilibrium only when every firm is operating at MC=MR, all firms are earning only normal profits and neither new firms is entering in the market nor existing firms are leaving the market. (Something impossible, isn’t it? It’s just a theory dear !!)
  26. In long run under imperfect competition, the fear of prices falling more than the cost (which means prices going lower than the cost) forces the sellers to limit the long run growth of the firms.
  27. In perfect competitive market, if in the long run there occur increasing returns to scale then it will affect the market equilibrium because due to this change will occur in demand, supply and price and hence the whole industry will become unstable.
  28. When AR is constant in perfect competition then AR=MR (remember the diagram showing relation between AR and MR)
  29. MR can be shown as a slope of a tangent to any point on the TR curve.
  30. At the shut down point P=AVC.
  31. In all forms of imperfect competition, the AR curve is falling downward.
  32. The supply curve of a firm under perfect competition is the MC curve above AVC curve.
  33. In short run, if the price of a commodity rises then it will lead to more supply of goods. This happens due to two main reasons – a. existing firms expanding their output and b. new firms entering the market getting attracted by bigger profits.
  34. The true strength of a monopolist firm may be judged by the gap between AR and MR. If the gap is more, it indicates that to sell more the firm is lowering the price of its product. If the gap is less, then the monopoly firm is selling the product at desired price levels.
  35. In perfect competition, if an individual seller wants to double his profit, he simply has to sell double the quantity. Because in perfect competition a firm is a price taker. So it can sell unlimited quantity at a given price. It can’t alter the price.
  36. In oligopoly, there exists Kinked Demand Curve. It means if a seller increases the price of his product then no competitor will follow him. Thus, his product will be sold lesser thereby decreasing his profits. On the contrary, if he decreases the price of his product, all the competitors will also do the same. So there will be little rise in the sales. Hence, it can be summarized that in the upper part of the kinked demand curve Ed >1 and in the lower part of the curve Ed<1. In oligopoly, the firm faces ‘price rigidity’.
  37. Average profit is the difference between AR and AC (provided AR > AC). This profit is also known as Normal Profit.
  38. In perfect competition, if the prevailing price is such that the price line is tangent to the minimum point of the average cost curve then the firm will earn normal profit. (don’t panic, these lines are confusing but the concept is very simple – remember the diagram of Break-even point in perfect competition. )
  39. Under monopoly, the supply curve is absent because the monopoly firm is capable of selling its products such that MC < P. It means the firm is able to maximize its profit by charging a higher price from the customers. (You know that in perfect competition, the MC curve above the AVC curve and Price line is the supply curve of a firm. In monopoly the firm doesn’t let the MC touch the price line)
  40. In perfect competition, the AR and MR curves are same but in imperfect competition the AR and MR curves are different.

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Ch 5 – Indian Economy – A Profile

 

Unit 1 – Nature of Indian Economy

  1. Population of India dependent on agriculture at Independence – 72%. (56% in 2004-05, currently 53%).
  2. Every third poor person in the world is an Indian – Means 1/3rd of world’s poor live in India.
  3. There has been an increase in the absolute number of people engaged in agriculture activities in India.
  4. (India’s population growth rate = 2% at an average during the planning period)
  5. Population is below poverty line = 29.8% (Planning commission survey in 2009-10)
  6. The present dependency rate ( age below 15 and above 64 yrs) is nearly 57.5% in India & it is much less in developed countries.
  7. Gross domestic savings were generally below 20% of GDP (at current prices) between 1950-90. They were 30.8% in 2011-12. Gross domestic capital formation was 35% in 2011-12.
  8. As per 66th Round of survey by National Sample Survey Organization (NSSO) of 2009-10, unemployment rate is as high as 6.6 per cent of the labor force (basis on Current Daily Status- CDS).
  9. In 2007-08, Percentage of people unemployed in urban areas (CDS Basis) are: Males- 6.9% Females – 9.5%. Percentage of people unemployed in rural areas (CDS Basis) are: Males- 8.5% Females – 8.1%.
  10. India’s global relative rank in 2010 on HDI index is 119 among 169 countries. Its relative global rank is 136 among 187 countries.
  11. HDI Index in 2010 was .547 which further marginally improved to 0.554 in 2012.
  12. Gini Index of India is 0.368 for period 2000-10. [Human Development Report 2010].
  13. India’s Gini Index was more favorable than those of comparable countries like South Africa, Brazil, Thailand, China and even USA.
  14. India’s National Income [Net National Product at factor cost] in 2011-2012 was Rs. 45,72,000 crore (at constant prices)
  15. Over 60 years, NNP increased by 17 times. In 1950-51 it was 2,55,000 crores. On an average, the NNP has increased at a rate of a little less than 5% per annum. [First 3 decades it was 3.5% and in last 30 years it was 5.5%]
  16. Per capita income of India in 2011-12 was Rs.38,037 – much lower than USA, UK, Germany & also China, Sri Lanka, Indonesia etc.
  17. Per capita income in India was Rs. 7,114 in 1950-51 (at constant prices). It has increased by more than 4 times during the planning period [6 Decades]. [Average 2.2%. First 3 decades it was 1.4% and in last 30 years it was 3.5%]
  18. Occupational Structure of working population in India in 2009-10 was: Primary Sector 53.2%, Secondary Sector 21.5%, Tertiary Sector 25.3%.
  19. Contribution of various sectors in the composition of GDP of India in 2011-12 was primary Sector 1%, Secondary Sector  30.2%, Tertiary Sector 55.7%.
  20. Indian railway – Asia’s Largest and World’s Second largest rail network under a single management. As per ICAI module it is fourth largest. The railways route length is nearly 64000 kms.
  21. The Indian road network has become one of the largest networks in the world aggregating 4.69 million km.
  22. The installed electricity generating capacity of India in 2011-12 was Rs. 2,36,000 MW.
  23. Land under irrigation is 88.4 million hectares in 2008-09.
  24. Primary educational institutions has nearly quadrupled.
  25. Higher secondary educational institutions has increased by 23 times. Now there are more than 35,500 colleges and 690 universities.
  26. The Literacy Ratio has increased to 74% in 2011[Economic survey 2011-12]
  27. The number of doctors has increased by more than 14 times increasing from 61.8 thousand in 1951 to around 9.22 lakh in 2011.
  28. The bed population ratio in India is 1.03 per 1,000 population.

 

 

Unit – 2 Role of different sectors in India

  1. Agriculture – employment, national income, support industries, foreign trade, supply food and fodder, contributes to government revenue, solves urban congestion and brain drain
  2. Contributes 14% of GDP. Employment to around 53% of the population.
  3. In 2011-12, agricultural exports formed about 12% of National Exports.
  4. Agro Imports = 3% of national imports in 2011-12.
  5. Major agricultural exports are: Jute, tea, tobacco & coffee.
  6. Special agricultural Product Scheme was started to promote export of fruits, vegetables etc.
  7. Green Revolution was started in 1966. Also called Wheat Revolution.
  8. HYV was restricted to five crops – wheat, rice, jawar, maize & bajra.
  9. Production of food grains: 259 million tonnes in 2011-12. Increased over 4 times in 6 decades.
  10. Green Revolution stressed on (a) Use of HYV seeds (b) proper irrigation facilities (c) Extensive use of fertilizers.
  11. The production of sugarcane in 2011-12 was 361 million tonnes.
  12. Productivity of wheat = 3140 kilograms per hectare in 2011-12.
  13. Per capita availability of food grains = 463 gms in 2011.
  14. The productivity of food grains has on average grown at a rate of 2.42 % per annum.
  15. Area under superior crops (rice & wheat), non-crop sectors and commercial crops is increasing and area under the inferior crops is declining.
  16. Measures taken under the tenancy reforms were: (a) Regulation of rent (b) Security of tenure (c) Conferment of ownership rights on tenants.
  17. Rent charged by zamindars before independence was 30% to 75% (After independence it was 5%-50%)
  18. The maximum limit of land that a family could hold was 18 acres of wetland or 54 acres of un-irrigated land. Around 2.98 million hectares of land had been declared surplus due to these reforms.
  19. Problems – slow & uneven growth, not so modern agriculture, flaws in land reforms, problem in finance, warehousing and marketing
  20. About 60% of the net sown area is rain fed.
  21. 44% of the gross cropped area is covered by HYVP.
  22. Only 40% of the gross cropped area has irrigation facilities.
  23. Measures- Many schemes have been initiated for agriculture sector like MGNRESGS (Mahatma Gandhi national rural employment scheme), National Food Security Mission (NFSM), Accelerated Pulses Production Programme(A3P), Rashtriya Krishi Vikas Yojana (RKVY), Forecasting Agricultural Output using Space, Agro-meteorology and Land-based Observations (FASAL), Extended Range Forecasting System (ERFS) etc.
  24. NMSA (National mission for sustainable Agriculture was launched in 2011-12 to enhance food security.
  25. Due to land ceiling act Govt declared nearly 2.98 million hectares of land as surplus. Out of it 2.18 MH land was distributed to 5.58 beneficiaries.
  26. Role of Industry in India – Modernising agriculture, providing employment, share in GDP, contribution to Industries engage 19% of labour force in India. [2007-08]
  27. Industrial Growth helps the economy to attain self sustaining growth.
  28. Classification of industries on the basis of end use: (a) Basic Good industries-minerals, cement, etc. (b) Capital Goods Industries-machinery rail equipments, etc. (c) Intermediate Goods Industries-rubber, plastic, etc (d) Consumer Goods-watches, cosmetics,etc.
  29. In 2009-10 the share of industrial sector in GDP was 26%. For year 2011-12 it was 30%.
  30. Manufactured goods contribute around 2/3rd  of the export earnings of India
  31. The industrial production has grown at an annual average rate of 6.2% p.a. over the planning period.
  32. The industrial rate of growth was 10.5% in 2009-10.
  33. Mahalonobis Model (in the second plan) stressed upon the establishment of capital & basic good industries.
  34. The mean growth rate of industrial goods in Eleventh plan was: (a) Basic Goods- 6.1% (b) Capital Goods-18.0% (c) Intermediate Goods – 5.6%. The rate of Consumer Goods including durable goods & Non-durable goods was 9.8%.
  35. In the Second Plan, Public Sector Steel Plants were set up in Bhilai, Rourkela & Durgapur.
  36. Under Scientific & Industrial research Council, research laboratories were set up.
  37. Out of 248 Central Public Sector Enterprise (CPSEs) – 220 were in operation, out of which 158 are making profits and 62 earned losses.
  38. In March 2011, the number of public sector industrial units increased to 248.
  39. The MSME (Micro, Small and Medium Enterprise) Sector employed nearly 73 million persons in 2010-11.
  40. The MSME Sector contributes about 40% of total exports. Their number stood at 31 million (2010-11).
  41. The average industrial growth rate during 1951 to 2007-08 has been around 6.2% relative to the target of 8% p.a.
  42. The average under utilization of capacity in the industrial sector is 40% to 50%.
  43. Services accounted for one third of total exports in India in 2011-12.
  44. Service exports reached USD 106 billion in 2008-09. Share in GDP 56% in 2011-12. Give employment to around 25% population.
  45. Services exports grew by more than 23% per annum during 2001-11.
  46. In 2006, India’s share in world’s total commercial services expert was 2.7% as compared to 2.3% in 2005.
  47. In 200, India is ranked 12th among the list of exporters of service.
  48. The average growth rate of Service Sector in X Plan was 9%. Govt. aimed for 9.4% growth in XI Plan is 9.4%. actual growth 10%. 12th plan target is 9% p.a.
  49. Among the sub sectors of services, “transport, storage and communication” has been the fastest growing with growth rate of 12%.
  50. Growth Rate – Trade hotels and restaurants 8.5%. Financial, Insurance, Real Estate 11%. Community, Social & Personal services 8.3% in Eleventh plan.
  51. India has the THIRD largest scientific & technical manpower in the world.
  52. India’s Medicine system – Ayurveda. Unani. Nature care.
  53. IT enabled services (ITES) such as BPO (business process outsourcing) have been growing rapidly @ 60-70%.

 

Unit-3 National Income in India

  1. GDPMP = Monetary value of all goods and services produced in a country in a year
  2. NDPMP = GDPMP – DEPRECIATION
  3. GNPMP = GDPMP + NFIA (Net Factor Income From Abroad)
  4. GDPFC = GDPMP – NET INDIRECT TAXES (TAXES – SUBSIDIES)
  5. NNPMP = NDPMP + NFIA (Net Factor Income From Abroad)
  6. NNPFC = NNPMP – NET INDIRECT TAXES (TAXES – SUBSIDIES)
  7. Disposal Income is the income remaining with the individual after deduction of the taxes levied against his income and his property by the Government. Personal income is the income actually received by persons from all sources in the form of current transfer payments and factor income – According to Peterson
  8. The GDP of India at current prices in 2010-11 is Rs. 72,66.967 crores. (Rs. 49,37,006 crores at constant prices.)
  9. There are two distinctive phases of economic growth in India since Independence: 1950-80 and 1980-2010.
  10. During the period 1950-51 to 1979-80, growth in GDP was 3.2 per cent. During 1980-2010 it was 6.6%.
  11. India now ranks among top ten fastest growing countries in the world and having a growth rate of 7% during 2008-11 just after China [Growth Rate of China – 9.6%]
  12. Against the annual average target growth rate of 8% during the Tenth Plan (2002-07), achievement rate is 7.6%. The XI plan kept a target of 9%. Provisional achievement was 7.8%.
  13. In the third plan, per capita growth was zero per cent.
  14. In the Eleventh Plan [2007-12], per capita income growth accelerated to 6.3 per cent per annum.

 

Unit-4 Basic understanding of Tax System in India

  1. Direct Taxes are progressive in nature and indirect taxes are regressive or differential in nature.
  2. The share of Direct taxes in the Gross Tax revenue (both Centre & State) was 41% in 2011-12 while that of indirect taxes declined to 59%.
  3. Tax revenues forms about 16% of total national income of India. [2011-12]
  4. Tax revenue collected by Central & State Government were more than Rs. 14,60,000 crore in 2011-12.
  5. Income tax was introduced in 1860, abolished in 1873 and reintroduced in
  6. Corporate Tax – Domestic registered companies 30% and @40% for foreign companies.
  7. Estate duty (levied on total property passing to the heirs on the death of a person) was introduced in 1953 and was abolished in 1985.
  8. Annual tax on wealth was introduced in 1957 and abolished on 1.4.1993 except certain items.
  9. Gift tax was introduced in 1958 and abolished in 1998. Gift tax was partially reintroduced in April 2005.
  10. Direct Tax Code (DTC) Bill, 2010 was introduced in Parliament. The DTC is likely to be implemented from April 2012.
  11. Import duties are generally levied on the basis of ad valorem (as a % of the price of the commodity)
  12. MODVAT was introduced in 1986-87. MODVAT was replaced by CENVAT.
  13. CENVAT was introduced in 2000-01. CENVAT consist of only one basic excise duty of 8% and some special excise duties. The basic rate of 8% is applicable to all excisable commodities.
  14. Excise duty is levied on production and has absolutely no connection with its actual sale.
  15. In India Sales Tax is in two forms i.e. State Sales Tax and Central Sales Tax. At present CST Rate is 2%.
  16. VAT was introduced in 1999 and was implemented in April, 2005 in some states (including Delhi).
  17. At present, all states/union territories have successfully implemented VAT.
  18. Service tax is a form of indirect tax imposed on specific services called taxable services. It was introduced in the year 1994-95 and covering more than 120 taxable services.
  19. Agricultural income is wholly exempted from Income Tax.
  20. In 2011-12, most important contributor to tax revenue is corporation tax at 36%, excise duties at 18.9%, personal income tax at 18.6% and custom duties at 17%.
  21. In India in 2009-10. the % of direct taxes in GDP is 9.5%. [2009-10]
  22. Service Tax contributes just 10% towards tax revenue and 1.3% towards GDP [2009-101 Service Sector Accounts for more than 57% of GDP.
  23. The cost of tax collection (Central Government) has increased to more than 7,100 crores in 2011-12. However it is also noticed that cost of tax collection for the Income Tax Department is the lowest in the world at the rate of 60 paisa for every Rs. 100 collected as a tax.
  24. Evasion and tax avoidance are very high. It has been estimated that black money is 50% of the country’s GDP
  25. Central sales tax in inter-state sales tax. This tax in non-rebatable tax and in incongruent (non-adjusting) with the system of VAT. That’s why it is being phased-out (abolished) in stages
  26. The indirect tax regime in India is being replaced by Goods and Services Tax (GST).

 

CA CPT Economics Chapter – 6  Select Aspects of India Economy

 

Unit-1 Population

  1. In 2011, the population was 121.02 crores.
  2. India’s population rank is second in the world after China.
  3. India has only about 2.4% of the world’s area and 2% of the world’s income but India accommodates about 17.5% of the world’s population.
  4. Every sixth person in the world is an Indian.
  5. The annual addition to India’s population is almost equal to the total population of Australia.
  6. Among the states, UP is most populous followed by Maharashtra. The combined population of these two states is far greater than the total population of USA which is the third most populous country in the world.
  7. 1921 – ‘Year of Great Divide’ for India’s population.
  8. The growth rate of population became negative in India in 1911-1921.
  9. Birth rate in 2011 was 8% and Death Rate was 7.1%.
  10. Indian population registered a growth of 1.64% p.a. during the decade 2001-11.
  11. Among all the states, Kerala has the lowest birth rate of 14.7 % (2007) and Uttar Pradesh has the highest birth rate 29.5% (2007).
  12. Considering death rate, West Bengal has the lowest death rate of 3% and Orissa has the highest death rate of 9.2 in 2007.
  13. In 2011, density of population was 382 persons per square kilometer.
  14. Kerala, West Bengal, Bihar & U.P have density higher than the average density.
  15. As per latest module data, Bihar is the most densely populated state in the country where about 1102 persons are living per square km. West Bengal is at second with 880 persons living per square km.
  16. Arunachal Pradesh has density of 17 persons per sq. km.
  17. Population Density of Delhi is Second number was taken by Chandigarh with 9252 persons living per sq. Km.
  18. Sex ratio in India was 940 in 2011. For rural & urban India was 946 and 900 respectively in 2001.
  19. In Kerala, the sex ratio for females is favourable. In Kerala, ratio of females to males in 2011 was 1084.
  20. Haryana has lowest female sex ratio of 877 (2011) among states.
  21. If death rate is high, life expectancy will be low.
  22. In 2011 life expectancy rate was 63.5 (Overall). In case of Male & Female, it was 6 & 64.2 respectively.
  23. Amongst the states. Kerala had the highest life expectancy at birth at 71.4 and Madhya Pradesh had the lowest life expectancy at birth at 58 in 2006.
  24. 10th plan targeted reduction in infant mortality rate (IMR) to 28 per thousand and Maternal Mortality Rate (MMR) to 1 per 1000 live births by 2007.
  25. Kerala has the highest literacy ratio of 92% and Bihar has the lowest literacy ratio of 53%.
  26. In 1951, in India, only 27% of males & 9% of females were literate.
  27. In 2011, 74% of the population was literate.                                                                                                                                                                     {Males 82.1%; Females 65.5%}.
  28. The eighth plan aimed at complete eradication of illiteracy among people in the age group of 15-35 years by the end of the plan. But it is estimated that it would take more than 30 years for the Indian population to be fully literate.
  29. The main reasons attributed to population growth are – high birth rate, relatively lower death rate and immigration.
  30. Population Explosion is a transitory phase according to the theory of Demographic transition. India is passing through the second stage of demographic transition. It entered this phase in 1921 which is also known as ‘Year of Great Divide’. This theory of demographic transition was propounded by two economists named Coale and Hoover.
  31. Production of food grains increased to 260 million tonnes in 2011-12. Per capita availability of food grains was 463 grams in 2011-12.
  32. In India, around 63% of the population is in the age group of 15-64 years and 37% of population is below 15 or above 64 years.
  33. Cafeteria approach is an approach in which various contraceptive methods were offered and the acceptors had the freedom to choose any of the methods.
  34. Family planning was organized in 1966.
  35. Emergency period was declared in 1975-77.
  36. National Population Policy 2000[NPP] was adopted to encourage two child norm and stabilizing population by 2046 A.D.
  37. As per 2010 data, Infant Mortality Rate in India is highest for Madhya Pradesh (62) and lowest for Kerala (13).
  38. The Eleventh Plan has continued with the targets of the Tenth Plan i.e. Reducing IMR to 28 per 1000 and MMR to 1 per 1000 live birth by the end of Twelfth plan aims at achieving IMR of 25 and MMR of 100 per 1,00,000 live births by the end of the plan.

 

Unit-2 Poverty

 

  1. Poverty which is not related to the income or consumption expenditure or distribution is called absolute poverty. It is measured in terms of calorie count or monthly/daily expenditure.
  2. Poverty which is related to the income or distribution is called relative poverty. It is used to compare the poverty situation between two countries.
  3. Absolute Poverty is relevant for less developed countries whereas relative poverty is relevant for developed countries.
  4. The minimum daily consumption of calories in urban areas is 2100 calories and in rural areas is 2400
  5. NSSO uses two types of recall periods – Uniform recall Period (URP) and Mixed Recall Period (MRP)
  6. While URP uses 30-day recall / reference period for all items of consumption, MRP uses 365 day recall / reference period for 5 infrequent purchased non-food items namely, Clothing, Footwear, Durable Goods, Education & Institutional Medical Expenses.
  7. As per Tendulkar committee report set up by planning commission, the national poverty line for monthly expenses was Rs. 860 urban and Rs.673 rural (2009-10 prices). This committee rejected the URP (Uniform Recall Period) based method of estimating poverty line and suggested MRP (Mixed Recall Period) method.
  8. Head count ratio (HCR) is the proportion of a population that exists, or lives, below the poverty line.
  9. Around 29.8% people are below poverty line in 2009-10.
  10. The Human Development Report (HDR) 2010 measures poverty in terms of a new parameter namely Multidimensional Poverty line (MPI). The MPI shows the share of population which is multidimensionally poor in terms of living standards, health and education. According to this parameter, India has a poverty index of283.
  11. Swaran Jyanti Gram Swarozgar Yojna (SGSY)- April, 1999: [Integrated Rural Development Programme (IRDP) + Million Wells Programme (MWS) + Allied Programmes]. It is the only self-employment programme for the rural poor. Up to Feb 2012, about 168 lakh swarozgars have been assisted. SGSY has been restructured as the National Rural Livelihoods Mission (NRLM).
  12. THE MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME(MGNREGS): The MGNREG Act was notified in 2006 in selected districts and was later extended throughout the country in 2008. It aims at enhancing livelihood security of households in rural areas of the country by providing at least 100 days of guaranteed wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work. During 2012-13. more than 4.39 crore households were provided employment under the scheme.
  13. The Swarna Jayanti Shahkari Rozqar Yoiana (SJSRY): December 1997
  14. Indira Aawaas Yojna (IAY) give the financial assistance for construction of house to be given to the poor living in rural areas.
  15. SJSRY = Nehru Rozgar Yojna + Urban Basic Services Programme + PM’s Integrated urban Poverty Eradication Prog. The scheme was revamped in 2009, aims to provide gainful employmenttothe urban unemployed or underemployed poor by encouraging the setting up of self-employment ventures or provisions of wage employment. A Total of more than 4,00,000 beneficiaries have been assisted in 2012-13.

 

Unit-3 Unemployment

  1. Removal of unemployment has been given serious consideration only after Fifth Plan.
  2. The important forms of unemployment are: Voluntary, Frictional, Casual, Seasonal, Structural, Technological, Cyclical, Chronic, Disguised
  3. Most of the unemployment in India is structural unemployment.
  4. It is estimated that over one-third of India’s work force is disguisedly unemployed.
  5. The 11th Plan aimed at creating 58 million jobs during the plan.
  6. Labour Force Participation rate (LFPR) is defined as the number of persons in the labour force per 1000 persons. People who are working and those who are willing to work.
  7. Work Force Participation rate (WFPR) is defined as the number of persons/ person days employed per 1000 person/ person days. It excludes those who are willing to work but are unemployed currently. Hence we can say that LFPR = WFPR + PU (Persons Unemployed). It is a part of LFPR.
  8. Employment & unemployment can be measured through: (a) Current Daily Status(CDS) (b) Current Weekly Status (CWS) (c) Usual Person Status (UPS)
  9. Usual Persons Status (UPS): Usual Person Status (UPS) measure counts the number of unemployed for past 365 days.
  10. Current Weekly Status (CWS): The reference period here is a week. According to this estimate a person is said to be employed for the week even if he is employed only for a day during that week.
  11. Current Daily Status (CDS): The reference period here is a day. It counts every half-day’s activity status of the respondent over the week.
  12. Usual status gives us the lowest but the most chronic measure of unemployment.
  13. The current unemployment rate [as per 66th Round of NSSO – 2009-10] are: UPS- 2%, CWS- 3.6%, CDS- 6.6%.
  14. As per NSSO survey overall labour force expanded by 11.7 million which resulted in unemployment numbers to be 6.3 million. Increase in work opportunities were 18 million under CDS.
  15. As per Usual Status, 40% of population belongs to labour force while 98% of the labour force was employed according to UPS. Only 26% Women are employed.
  16. In the rural areas, generally, the female unemployment rate was lower than the male unemployment rate.
  17. In the urban areas, generally, the female-unemployment rate was higher than the male unemployment rate.
  18. Latest developments are encouraging in this direction. A national policy on skill development got formed in 2009 aiming at giving the youth improved skills, knowledge and necessary qualifications thus enabling them to get good jobs.
  19. More and more educated youth is expected to join the labour force during 12th More job opportunities are being opened in manufacturing, agro processing, infrastructure, supply chains etc.
  20. Government also started STAR Scheme to facilitate high class professional skill training to urban youth at highly subsidized rates.

 

Unit-4  Infrastructure

 

ENERGY

  1. 3% rise in industrial Production in the world is accompanied by 2% increase in energy consumption.
  2. India is, both, a major energy producer and consumer. India currently ranks as the world’s 5th largest energy producer, accounting for about 4%of the world’s total energy production.
  3. India is also the world’s 4thlargest energy consumer, accounting for about 6% of world’s total energy consumption.
  4. In India, around 30% of the population is below poverty line and nearly 50% of the population does not have the purchasing power to enter the market for commercial energy.
  5. Firewood & Dung Cakes are the most important non commercial traditional source of energy.
  6. About 23% of the energy consumed is obtained from non commercial sources.
  7. Major uses of electricity are industry (37%),domestic (25%),agriculture (21%)and commercial establishment (10%).
  8. Our installed capacity inward was 2,36,000 MW in 2011-12. As per the latest module, over period of 61 years, there has been 100times increase in installed capacity. We are roughly adding 4000- 5000 mw every year.
  9. Of the present capacity, 66% is in the thermal, 17% in the hydel, 2% is in the nuclear and 15% is in the other sectors (wind, biogas, waste etc.)
  10. In terms of generation of power, thermal plus non conventional energy source other than wind is contributing 5%, hydel around 12.5% and nuclear 3.0% and other are contributing 12%.
  11. In the Year 2011-12, out of 710 mtoe (million ton of oil equivalent) of primary energy demand, 536mtoe demand was for commercial energy and 174 mtoe was for non commercial energy. Out of 536mtoe demand for commercial energy, 514mtoe was domestically produced and 197mtoe was imported. Non commercial energy was produced and consumed domestically. Thus, 36% of the demand for commercial energy was met through imports
  12. OPEC stands for Organization of Petroleum Exporting Countries. (It is a perfect example of oligopolist Market).
  13. Since 1973, our oil import bill has increased substantially. Oil Import bills grew at a record level of Rs. 6,00,000crores in 2011-12.
  14. POL stands for petrol, oil & lubricants which contributes about 35% of the import bill.
  15. National average of transmission & Distribution losses is more than 20%.
  16. Plant Load Factor (PLF) measures the operational efficiency of athermal plant.
  17. Plant load factor varies across the regions. It is lowest in Eastern Region (62% in 2012-13 and highest in Southern region (81% in 2012-13). If we consider SEBs, central sector and private sector, we find that PLF was 65% in SEBs, 79% in central sector and 79% in private sector in 2012-13.
  18. Till date, nearly 19% of villages are not electrified.
  19. Electricity Act was passed in 2003 and Electricity Amendment Bill was passed in 2005. Certain provisions of The Electricity Act 2003 were amended in 2007 by passing of Electricity (Amendment Act) 2007.
  20. “Partnership in Excellence” Programme was launched by Ministry of Power to improve generation of power. Under it 26 thermal stations with PLF less than 60% were identified for efficiency improvement.
  21. Power Sector in Delhi was privatized in 2002.
  22. NTPC – National Thermal Power Corporation.
  23. NHPC – National Hydroelectric Power Corporation.
  24. NPCIL – Nuclear Power Corporation of India Limited.
  25. An All India Power Grid, also called National Grid is being developed. This has enabled inter-regional energy exchanges of about 49000 million units in the financial year 2012(apr-dec), thus contributing to greater utilization of generation capacity and improved power supply position.
  26. Nine sites were identified for the development of Ultra-Mega Power Plants [UMPP] with capacity of 4000 M W each. Four of the UMPPs are already at different stages of
  27. ‘Rajiv Gandhi Grameen Vidhyutikaran’ programme was started in 2005. The scheme provides for free electricity connections to Below Poverty line (BPL) families. Rural Electrification Corporations is the nodal agency for this. Under the scheme, nearly 1,00,000 villages have been electrified and connections to 200 lakh BPL households have been released.
  28. The Bureau of Energy Efficiency (BEE) [u must have seen their advt. on TV promoting CFL and LED] helps in promoting clean and efficient energy.

 

RAILWAYS

  1. Indian Railways is world’s fourth largest rail network under a single management and served for over 165 years.
  2. The ratio of revenue earned between freight & passengers are 70:30
  3. The total route length of railways was 64,600 kilometers. Out of which 21 thousand kilometers were electrified.
  4. During 2011-12, it carried more than 8200 million of passengers & 970 million tonnes of freight traffic.

 

ROADWAYS

  1. The Indian road network is one of the largest network in the world [as per the latest module it is mentioned that it is one of the largest network and not second largest].
  2. Today, India has a network of69 million Kilometers. More than half is surfaced.
  3. The National Highways (NH) which comprise only about 2%of total length of roads now encompass a road length of 76,800 kms. They carry more than 40% of the total road traffic.
  4. The rural road network connects around 65 per cent all weather roads.
  5. Roads occupy a crucial position in transportation matrix of India as they carry nearly 60% of freight & 80% of passenger traffic.
  6. Many initiatives had been taken by the govt. like building the golden quadrilateral connecting Mumbai, Delhi, Kolkata and Chennai ; North-South and East-West Corridors, Port connectivity, PPP (Public-Private Partnership) in road development and maintenance. NHDP means National Highways Development Projects
  7. PMGSY– Pradhan mantra gram sadak yojna was launched to provide road connectivity to all unconnected villages.

 

WATERWAYS

  1. India has about 14500 kms of navigable waterways which comprises rivers, canals, back waters, creeks. About 50 million tonnes of cargo is being annually moved by inland water transport.
  2. India has longest coast line of 7517 Kms, 12 major ports & 200 minor ports. Almost 95% of India’s global merchandise trade is carried through the sea route. Five waterways have been declared as National Waterways. The 11th plan aimed at adding three more waterways to this list.
  3. It is estimated that by the end of Eleventh Plan coastal traffic increased to 220 million tonnes Gross Tonnage.
  4. As compared to .192 million Gross Tonnage (GT) at the time of Independence, it was 10.4 million GT in 2011. In terms of overseas shipping tonnage, India ranks 20th in the world. The fleet at end of Mar 2011 was 1071 vessels (1% of world’s fleet).
  5. The country has one of the largest merchant and shipping fleet among developing countries.
  6. The total traffic carried by both the major and minor ports was 560 million tonnes during 2011-12.
  7. The 12 major ports carry about 64% of the total traffic, with KANDLA as the top traffic handler in each of the last 5 years. [Earlier it was Vishakhapatnam]
  8. Coastal Shipping is the cheapest mode of transport. But the importance of inland water transport (rivers and canals) has decreased over the years due to rapid expansion of Road and Rail Transport.
  9. Indian ports face a lot of problems like inadequate container handling, inefficient port equipments and frequent break down of cargo handling equipments.
  10. GRT stands for Gross Registered Tonnage.

 

AIR TRANSPORT

  1. There are 10 scheduled passenger operators and 3 cargo operators in the country with the combined fleet size of 413 Aircrafts.
  2. Indian Airlines and Air India were amalgamated with National Aviation Company Ltd with brand name “Air India”. With effect from November’2010, the name of National Aviation Company Ltd. had been changed to Air India Ltd.
  3. Market share of Private players has reached 82 % during 2010.
  4. Airport Authority of India manages 125 airports, including 16 international airports and 23 civil enclaves at the Defense airports. Five international airport projects were successfully completed during the 11th plan through PPP route.
  5. Green field airports of International Standards are also constructed at Hyderabad, Bangalore & Goa. AAI (Airport Authority of India) is enhancing connectivity to North-East by way of Greenfield Airport at Sikkim.
  6. Green Field Airports with Private Sector Participation are also being constructed at Navi Mumbai, Kerala and Sikkim.
  7. An international green field airport is already operational in Kochi.
  8. The Department of Civil Aviation, Government of India, is responsible for regulatory cum development aspect.
  9. It is estimated that international and domestic passengers would increase by 12% & 8% respectively in the 12th
  10. International & Domestic cargo traffic is expected to grow at the rate of 12% & 10% respectively in the 12th
  11. Pawan Hans Helicopters Ltd. provides helicopter support service.
  12. India has become the 9th largest Civil Aviation market in the world.
  13. Domestic and international traffic growth is the second highest in the world next to China.
  14. Recent important developments in the Airlines & Airport Sector included:
  15. Modernization and restructuring of Delhi, Mumbai, Kolkata & Chennai Airports
  16. Development of Greenfield air-ports at Bangalore & Hyderabad on a Build-Own-Operate-Transfer basis with PPP.
  17. Approval of modernization of 35 Non-metro airports & 13 other airports to World-Class Standards in phases.
  18. Liberalization of FDI limit up to 100% through automatic route for setting up Greenfield Airports.
  19. A Civil Aviation Economic Advisory Council (CAEAC) has been set up to look into the economic issues facing the civil aviation sector
  20. Liberalization of bilateral air services agreement in line with the contemporary developments in international civil aviation sector
  21. The AERA (Airport Economic Regulatory Authority) was established in 11th plan to safeguard the interest of the users and service providers.
  22. Adoption of a limited Open Sky Policy in international travel to meet the traffic demand during peak season ,
  23. Adoption of trade facilitation measures in custom procedures to facilitate speedy clearance of air cargo
  24. For seamless navigation of civil aircrafts, a GPS-aided GEO augmented Navigation (GAGAN) project is being implemented.

 

POSTAL SERVICES

  1. India ranks 1st [Largest Netweork] in the World Postal Network. It started in 1837. Out of a total of 1.55 lakhs post offices in India, 90% are in rural area.
  2. On an average, one post office serves 7814 persons and 21.23 sg. Km area.
  3. With a view to improve the speed and volume of transactions, a range of e-enabled services such as electronic money order (eMO), e-payment and Instant Money Order (IMP) have been started.
  4. Presently more than 14000 post offices are computerized.
  5. Automatic mail processing centers (AMPC) have been set up at Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad for faster processing of mails.
  6. E-post services were started in 2001 in some states.
  7. The department of Posts has also launched a pilot projects “Project Arrow” with the aim of providing fast and reliable postal services to the consumers.

 

TELECOMMUNICATION

  1. At the time of Independence, India had a total of only 321 telephone exchanges with about 8200 working connections. There were only 338 long distance public call offices and 3324 telegraph offices.
  2. By Oct 2012, India had more than 935 million connections (wireline and wireless). [May 2012 it was 900 million connections]
  3. As on Dec 2011, more than 5.8 lakh villages were connected using a village public telephone (VPT). Thus 98% of villages in India have been covered with VPTs.
  4. India’s telephone network is SECOND largest in the world after China.
  5. Density: There are 76.75 phones per hundred populations.
  6. While tele-density in rural areas is 40.6 percent, the urban tele-density shot up to 159 per cent in October 2012.
  7. Up to Feb 2011, there were about 943 million connections.
  8. Two PSUs in the telecom sector are – Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) have been losing their market shares in fixed telephony and combined shares declined to 14% in December 2011.
  9. The internet connections increased to around 23 million in 2012 & broadband subscribers have increased to more than 15 million in Oct 2012.
  10. Telecom Regulatory Authority of India (TRAI) is regulatory authority for telecom in India.
  11. National Internet Exchange of India (NIXI) has been set up to ensure that Internet traffic originated and destined for India is routed within India.
  12. Foreign Direct Investment ceiling has been raised to 74 per cent from 49 per cent earlier.
  13. 12th plan aims at increasing the broadband connections to 175 million by 2017, increase rural tele-density to 70%, adoption of green policy in telecom.

 

HEALTH

  1. Health Related Data [Year 2011]: Health Centres – 1,76,820; Dispensaries + Hospitals – 38,832; Beds – 11,75,374 [2008], Nursing Personnel – 18,94,968 & Doctors (Modern)-9,22,177.
  2. Over the years, there has been a fall in the incidence of certain diseases like malaria, polio. T.B. and leprosy.
  3. But there is also a rise in the incidence of certain diseases like AIDS, blindness, cancer etc.
  4. Now the focus is not on providing hospitals but on providing better health and medical care.
  5. The bed population ratio in India is 1.03 beds per thousand of population which is very low.
  6. National rural health mission was started in 2005.
  7. Accredited Social Health Activists (ASHAs) have been selected and trained in health care for various villages.
  8. Pradhan Mantri Swasthiya Yojana has been launched to correct regional imbalances.
  9. Janani shishu karyakaram (JSSK) is a new initiative started in 2011.
  10. The 12th plan is stressing on the need of having a Universal Health Coverage(UHC) for all in the country.

 

EDUCATION

  1. India has the one of the largest education system in the world. 84% of rural habitation in India now have a primary school located within a distance of 1
  2. The National Policy on Education (NPE) was made in 1986 and further modified in 1992. It aims at
    1. Univesal access and enrolment
    2. Universal retention of children upto 14 years of age.
    3. A substantial improvement in the quality of education.
  3. NPE had set a goal of expenditure of education at 6% of As against this target, the actual expenditure of central and state governments was 4% of GDP in 2011-12.
  4. Right of Children to Free and Compulsory Education Act (RTE Act) 2009 has made free education for all children between the age of 6 and 14 years, a fundamental right.
  5. The Gross Enrollment ratio (the ratio which shows the proportion of children in the 6-14 years age group actually enrolled in elementary schools) increased to 115 in 2011.
  6. The Sarva Shiksha Abhiyan (SSA) was launched in 2001-02 -providing elementary education to all children.
  7. National Programme for Education of Girls at Elementary Level (NPEGEL) is an important component of SSA. This programme concentrates on education of girl child.
  8. Another important component of SSA is the Education Guarantee Scheme + Alternative and Innovative Education (EGS + AIE). This is specially designed to provide access to elementary education to children in school-less habitations and out of school children.
  9. In order to enhance access to secondary education and improve its quality, Rashtriya Madhyamik Shiksha Abhiyan (RMSA)was launched in 2009. For 12th plan as well, this abhiyan holds great importance. Number of secondary and higher schools in 2007-08 was 1,72,000.
  10. Achievements of SSA – till sept 2012 => 3,30,000 new schools, 16,00,000 additional class rooms. At present, there are more than 35539 colleges and 690 universities.
  11. There are seven national institutions on technology known as Indian Institute of Technology (IIT). These provide courses in engineering and technology.
  12. There are many National institute of Technology (NIT) consisting of erstwhile Regional Engineering colleges
  13. There are ELEVEN Indian Institutes of Management (IIM), which are centers of excellence in management education. (Kolkata, Ahmedabad, Bengaluru, Lucknow, Kozhikode, Indore, Shillong, Rohtak, Ranchi, Raipur, Tiruchirappalli, Udaipur, Kashipur)
  14. For adult education, the National Literacy Mission (NLM) was launched in 1998 as a Technology Mission. It aimed at imparting functional literacy to non-literates in the country in the age of 15-35.
  15. NLM was recast into Saakshar Bharat in 2009 and it will be continued in 12th plan as well.
  16. The Total Literacy Campaign (TLC) has been the principle strategy of NLM. NLM has accorded priority for the promotion of female literacy. The scheme of continuing education is now the flagship programme of the NLM.
  17. The XI plan 74% literacy rate has been achieved, but still there are gender gap in literacy and regional, social and gender disparities.
  18. Saakshar Bharat mission aims to raise the literacy rate to 80% by the year 2017. It also aims to reduce the gender gap to 10%.

 

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Unit – 5  Inflation

 

  1. Inflation result in the decline in the purchasing power of money.
  2. There are three types of inflation – (a) Demand Pull Inflation (b) Cost Push Inflation (c) Stagflation
  3. Demand pull inflation arises due to increase in money supply which increases the purchasing power of consumers.
  4. Cost push inflation occurs due to rapid increase in the cost of factors of production.
  5. Comparing (a) & (b) from above, it is much more difficult to control ‘b’.
  6. Deflation is just opposite of Inflation. It is a state when the price is falling and the purchasing power of money is increasing.
  7. The combined phenomena of demand pull inflation & cost push inflation is called stagflation. It happens when low rate of growth is combined with increase in the general price level.
  8. The period of 1991-94 was the period of stagflation in India.
  9. During the fifties, the average decadal rate of inflation was very low at 1.7%. [Lowest]
  10. Two ways of deficit financing are (a) Borrowings from bank (b) Printing more currently.
  11. In the Eleventh plan, the total borrowings from all sources are budgeted at nearly 39% of the Total resources required for the plan.
  12. The maximum inflation at 14% was recorded for the year 1966-67 following Chinese war [in 1962] & Pakistan War [in 1965] and the famine conditions during 1965-67.
  13. A new WPI series with 2004-05 base year was released in 2010. The new series has more items (676 items) and is more representative of the prices prevailing in the wholesale market. According to the new series, the ten year average of headline WPI inflation was around 5.3 per cent from 2000-2010.
  14. In the current year, the average inflation (April – December 2010) of 9.4 per cent
  15. The ten years average inflation, in fuel was around 8.9 per cent, in primary articles was 6.4 per cent and in manufactured products was 4 per cent.
  16. Stages of inflation in ascending order can be summarized as :-
    1. Suppressed inflation (inflation under control)
    2. Creeping inflation (rising @3% per annum but still not alarming)
    3. Galloping inflation (rising @ 8-10% per annum. Dangerous consequences on savings)
    4. Hyper inflation ( rising out of control. Often occurs during wars or economic crises)
  17. The Central Statistics Office (CSO) has come out with a new series on CPI with base 2010=100. This series intends to reflect the actual movement of prices at the micro-level. CPI has four indices – for industrial workers, for rural labour, for agricultural labour, for urban non-manual labour. It measures changes in price level of goods purchased by the ultimate consumer (at micro level). According to new series CPI combined for urban and rural was 7.65%, only urban was 7.38% and only rural was 8.25% in January 2012.
  18. Public expenditure has risen from 18.6% of GDP in 1961 to around 28% in 2012-13 (current prices). Around 40% of the govt. expenditure in India is on non-development activities.
  19. Quantitative measures to control inflation are – sales of securities in open market, increase in bank rate, increase in CRR & SLR
  20. Qualitative measures to control inflation are – Increase in margin requirement, consumer credit regulation, Rationing of credit, Moral Suasion and Direct Action.
  21. Fiscal measures means increasing the taxes or/and decreasing the govt. expenditure.
  22. Decreasing the investment expenditure is also a method to control inflation
  23. Other measures include controlling the distribution done through PDS (Public distribution System) and FPS (Fair Price Shops – Raation ki dukaan).
  24. “Wage Freeze” and “Dividend Freeze” are also used to control inflation. It means to stop increasing the wages or dividends. People will get less money so they will demand less.

 

Unit – 6 Budget and Fiscal Deficits

  1. Budget deficit shows the difference between total expenditure and total revenue. It does not give a true picture of the financial health of the economy. In India in recent times, budget deficit has lost its importance.
  2. Fiscal deficit = Budget deficit + Borrowings and other liabilities. It is a more comprehensive measure of the imbalances. It focuses on operations of the indebtedness of government. It is the measure of excess expenditure over the government’s own income.
  3. Revenue deficit is the difference between Revenue expenditure and Revenue receipts provided that revenue expenditure should be higher. Currently, India’s revenue deficit is negative which means our expenditure on imports is higher than our exports.
  4. The practice of RBI landing to Government through ad-hoc treasury bills was given up in 1997
  5. The government now taps 91 days treasury bills from the market.
  6. FRBM Act stands for Fiscal Responsibility & Budget Management Act.
  7. FRBM Bill was introduced in 2000 & FRBM Act was passed in 2003.
  8. FRBM act aims at reducing gross fiscal deficit by 0.5% of GDP in each financial year.
  9. During 2010-11, Fiscal Deficit was 4.8% of GDP. For the year 2011-12 it was 5.7%.

 

Unit – 7 Balance of Payments

  1. Balance of Payment refers to the balance of all economic transactions between two countries whereas Balance of Trade refers to the balance of export & imports of only visible items between two countries.
  2. BOP is regarded as the statistical statement of any country.
  3. Balance of payments = Balance of Current account + balance of capital account
  4. Balance of current account = Balance of Trade + Balance of services + Balance of unilateral transfers. It can be positive, negative or zeros.
  5. India experience surplus in the BOP in the Fifth plan.
  6. The sixth Plan characterized the BOP “acute”.
  7. Balance of payment on current account coves all receipts on account of earnings and all the payments on account of spending. It excludes borrowings or lending.
  8. All earnings and expenditures form a part of current account. E.g. remittances, donations, import/export of goods etc.
  9. Three consecutive years 2001-2004 witnessed the surplus in the current account.
  10. Capital Account deals with borrowings & lending, portfolio investments, govt. loans to other nations, private direct investment (FDI) etc.
  11. The merchandise trade deficit widened sharply during the TENTH Plan mainly on account of the growing oil import bill.
  12. India’s exports growth decelerated in 2011-12 to 21%. Imports grew at record 32%.
  13. This high growth in imports was due to high ratio of Petroleum, Oil and lubricants (POL), gold & silver.
  14. In 2011-12, the net FDI reached a level of $22 Billion.
  15. India’s foreign exchange reserves comprise foreign exchange assets (FCA), Gold, Special drawing rights (SDR), and reserve tranche position (RTP) in the International Monetary fund(IMF).
  16. When there is volatility in exchange rate, the RBI intervenes to smoothen it. This results in increase or decrease in the level of foreign exchange reserves depending upon the type of intervention.
  17. ‘Exchange Market Intervention’ by RBI means the sale or purchase of currencies by the RBI with the aim of changing the exchange rate of rupee vis-à-vis one or more currencies.
  18. The Special Drawing Rights (SDR) was created in 1969 by the IMF to supplement a shortfall of preferred foreign exchange reserve assets namely gold and US dollar. SDR is neither a currency, nor a claim on the IMF. It is a potential claim on the freely usable currencies of IMF members.
  19. The SDR today is redefined as a basket of currencies, consisting of the Euro, Japanese Yen, Pound Sterling, and US dollar.
  20. The primary means of financing the international Monetary Fund is through Member’s quotas which is payable in SDRs and part in member’s own currency.
  21. The difference between a member’s quota and the IMF’s currency is a country’s Reserve Tranche Position (RTP). RTP is accounted among a country’s foreign-exchange reserves.
  22. Considering imports, Asia and ASEAN continued to be the major source of India’s exports & imports accounting for nearly 60 per cent share.

 

Unit – 8 External Debts

 

  1. Forms of external assistance are grants & loan.
  2. About 90% of external assistance received by India had been in the form of loans. [10% of external assistance is in form of grants].
  3. The share of concessional debt in total debt now is about 13% [June 2012]
  4. Amount of external debt of India was Rs. 17,50,000 crores at the end of March 2012.
  5. India’s external debt as a % to GDP was 20% at the end of March 2012.
  6. Debt service ratio [The ratio of gross debt service payments (principle & interest) to external current receipts] reduced to 6% in 2011-12.
  7. In terms of ineptness classification, the World Bank has categorized India as a less indebted country SINCE 1999.
  8. India ranks 4th among the top 15 debtors of the country in 2011 after China, Russian Federation and Brazil.
  9. About 16.5% of GDP [2011-12] is constituted by exports of goods. This ratio represents the potential capacity of the nation to service external debt. It is relatively low. It makes India vulnerable to external shocks.

 

 

 

Chapter – 7 Economic Reforms in India

 

  1. The available foreign exchange reserves were sufficient to finance for only 3 weeks in 1991.
  2. National debt constituted 60% of the GNP in 1991. The wholesale prices (Inflation) increased at 12% annually.
  3. Economic Reforms were also called New Industrial Policy (NIP). They were undertaken in 1991 under Industrial Development and Regulation Act (IDRA) 1951.
  4. The sectors in which economic reforms were introduced were (a) Industrial sector (b) Financial sector (c) External sector (d) Fiscal policy (Taxation).
  5. Industrial licensing was abolished for all projects except for 18 industries related to strategic and security concerns. At present, there are 6 industries for which licensing are compulsory. With this about 90% of industries have been taken out of the licensing framework.
  6. These are Distillation of alcoholic drinks, Tobacco [Cigarettes], Electronic Aerospace & Defense equipments, industrial explosives, hazardous chemicals & Drugs and pharmaceuticals.
  7. At present, only three industries are reserved for public sector. These are (a) atomic energy (b) atomic energy substances (c) Rail Transport.
  8. According to the New Industrial Policy (NIP), 1991, the mandatory convertibility clause (it means exchanging loans or bonds with stocks) is no longer applicable for term loans, from the financial institutions for new projects.
  9. According to NIP 1991, entrepreneurs can start new business by just filling the information memorandum.
  10. Sick Industrial units are not closed immediately now, first they are referred to IRBI (Industrial Reconstruction Bank of India)
  11. Inverted Duty Structure means where a seller has to pay higher tax on the raw materials purchased but can charge less tax on his finished goods’ sales.
  12. In a latest development, the government allowed FDI limit to be increased in defense beyond 26% but it will be done on case-to-case basis. Further, for this clearance from the cabinet committee is mandatory.
  13. Foreign Direct Investment (FDI) is allowed up to 51% equity in high priority industries (Totaling 34).
  14. FDI is a non-debt creating capital flow which is very significant for a growing economy like India.
  15. Foreign Direct Investment was around $22 Billion in 2011-12.
  16. 100% FDI was allowed in Drugs & Pharmaceuticals, Tea, ISPs, B2B E-commerce, airports, Special Economic Zones (SEZ), advertising film sector.
  17. In Private sector banking & telecom sector 74% FDI was allowed; 26% FDI in Defense, 74% FDI in private banking – 49% through automatic route and above that after getting FIPB permission
  18. For a company to enter into defense production a minimum capital requirement is Rs. 100 Crores.
  19. MRTP Act was replaced with Competition Act, 2002. The new act was amended in 2007 & 2009. Under the new act ‘Competition Commission’ was established to prevent activities which were harmful for competition in India.
  20. Financial sector is comprised of (a) Banking Sector (b) Capital reforms (c) Insurance sector reforms.
  21. Before Financial reforms were introduced, the banking system used to give very less importance to the priority sectors of India like agriculture and handicrafts.
  22. PLR stands for Prime Lending Rates. PLR has been converted into a benchmark rate of banks rather than treating it as the minimum rate.
  23. A Credit Information Bureau has been established to identify bad risks.
  24. Bank rate has been raised to 10.25% since July 2013. Since April 2011, saving account interest has been raised to 4%. SLR is 23% and CRR is 4%.
  25. In 1993 RBI issued guidelines for licensing of new banks in the private sector.
  26. Fresh Guidelines for licensing of new banks were issued in Jan, 2000. Latest guidelines issued by RBI in 2013 to allow public sector companies with strong balance sheets and goodwill to enter into banking industry. The company should have minimum 10 years of track record.
  27. NPA stands for Non Performing Assists.
  28. SARFAESI – The securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. It was passed to help the banks in recovering their loans.
  29. Derivative products are those products which derive their prices from underlying securities. Derivative Products such as Forward Rate Agreement (FRAs) and Interest Rate Swaps have been introduced.
  30. Basel ll framework (banking norms) came into operation from March 2008. Basel III was introduced in 2013 and it is to be implemented by banks by 2019. It aims at increasing bank liquidity and decreasing bank leverage. This framework lays down norms to be followed by banks to ensure financial stability.
  31. RBI issued guidelines for the merger / amalgamation in respect of the private sector banks in 2005.
  32. EOU – Export Oriented Units, EPZ –Export Processing Zones
  33. EHTP – Exports & Hardware Technology Park, STP – Software Technology Park.
  34. Some schemes started to promote exports are Duty Drawback Scheme, Cash Compensatory Scheme, 100% EOU’s & EPZ’s.
  35. An export oriented economy which is witnessing an export-led growth can’t practice import restriction because External trade comprises of both in significant magnitude.
  36. Duty Free Export credit (DFEC) scheme was revamped into “SERVED FROM INDIA” scheme to promote exports.
  37. The rupee was devalued twice in July, 1991 (totaling 19%).
  38. India is moving towards fuller capital account convertibility in a phased manner.
  39. QR stands for Quantitative Restrictions. It was removed from 714 items in EXIM policy of 2000-01 & on 715 items in EXIM policy of 2001-02
  40. A step by step process is initiated for fuller capital account convertibility (Tarapore Committee II ). A five year time framework (2007-2011) has been given for full convertibility on capital account.
  41. India’s tariff rate (custom duty) in 2007-08 was 10%.
  42. The custom duty on non-agricultural product continues to be 10% in subsequent years.
  43. Cash Compensatory Scheme was abolished in July, 1991.
  44. Government is also planning to introduce Goods and Service Tax (GST) from financial year 2015-16.
  45. EXIM Scrip Scheme was replaced by Dual Exchange Rate Scheme.
  46. Export Promotion Capital Goods (EPCG), introduced in 1990 & liberalized in 1992 was introduced to encourage import of capital goods. It is still continuing with full effect.
  47. Exports from SEZ in 2009-10 amounted to more than RS. 220,000 crores and employment generated as on 31st March 2010 was more than 644,000 persons. (no new data available in module)
  48. SDR stands for Special Drawing Rights. They are associated with IMF.
  49. FERA – Foreign Exchange Regulation Act.
  50. FERA was replaced by Foreign Exchange Management Act (FEMA), 1999.
  51. FIPB – Foreign Investment Promotion Board.
  52. FTP – Foreign Trade Policy – started in 2004-09.
  53. In August 1991 the Government of India constituted the Tax Reform Committee to recommend a comprehensive (detailed or multi-dimensional) reform of both direct & indirect tax laws.
  54. FDI – Foreign Direct Investment. FII – Foreign institutional investor (also known as Foreign Portfolio investment). FPI or FII may be of short or long duration but FDI is a long term investment.
  55. 100% FDI is now permitted in many products such as distillation and brewing up of potable alcohol, manufacture of industrial explosives, manufacture of hazardous chemicals, laying of natural Gas Lines/ LNG Lines, cellular services (e.g. Vodafone), asset reconstruction companies, single brand retail trading etc.
  56. 26% FDI in Defence production, insurance and print media.
  57. 74% in private Banking (upto 49% by automatic route and rest by getting FIPB permission)
  58. 49% in Air transport service and in telecom sector and DTH 74%.
  59. FDI not allowed in gambling, lottery, chit funds, nidhi companies, atomic energy, trading in transferable Development rights etc.
  60. In the union budget 2013-14, it was proposed that if a foreign investor has 10% or less share in a company, it will be treated as FII otherwise it will be called FDI.
  61. Majority of central government enterprises belong to the public limited companies. Many of these enterprises were chosen for disinvestment / privatization.
  62. Three ‘Es’ were taken as criteria to judge the performance of a PSU – Efficiency, Effectiveness and Economy.
  63. Privatization means transfer of assets from public to private ownership or control.
  64. Essential pre-requisites for privatization are Liberalization & Deregulation
  65. An exchequer is a person who collects taxes.
  66. 100% privatization has taken place in Centaur Hotel.
  67. In 13 profit making centers, government has decided to stake through strategic sale.
  68. Government followed differential Pricing method of disinvestments in 2005-06.
  69. Disinvestment programme started in 1991-92.
  70. By the end of the year 2011-12, the government had raised 1 lakh crore through disinvestment.
  71. In 2005 National Investment Fund (NIF) was constituted to absorb and channelize the money realized by the government from disinvestment.
  72. Disinvestment can be done through Equity offer, Cross Holding and Warehousing.
  73. Equity offer means launching an IPO (initial public offer) to the general public.
  74. Cross Holding means one govt co. buys stake in another govt. co. so that the ownership of the govt. co. does not go in the private hands. E.g. BHEL buys 26% stake of SAIL.
  75. Warehousing means when govt.’s own financial institutions like SBI or LIC etc buy stake in any govt. co. and hold it till a suitable buyer is found.
  76. Disinvestment can be of three types – Minority, Majority and complete.
  77. Minority disinvestment e.g. – Andrew Yule & co., CMC Ltd., power grid corp of india Rural electrification ltd, NTPC and NHPC
  78. Majority disinvestment e.g. – Madras refineries ltd. (MRL) and Bongaigaon refinery & petrochemicals (BRPL) to India Oil Corp, Kochi Refinery ltd. to Bharat Petroleum corp. ltd. (BPCL), Modern foods to Hindustan lever, Bharat Aluminium Company (BALCO) to Sterlite, CMC (computer maintenance corporation) to Tata consultancy ltd. (firstly minority disinvestment was done in CMC ltd. And later majority disinvestment )
  79. When government retains around 26% in any of its PSU to get benefit from the company’s performance later on, then this is termed as keeping GOLDEN SHARE.
  80. Complete privatization e.g. – DVB to BSES and NDPL, 18 hotels of ITDC (Indian Tourism Development corporation) to private companies.
  81. The disinvestment program in India took off with the IPO of NHPC (National Hydroelectric Power Corporation.
  82. Some Navratna PSUs are – BPCL, ONGC, SAIL, MTNL, BHEL, NTPC.
  83. Out of 39 Public Sector Undertakings (PSUs) chosen for disinvestment/privatization, only 3 were making losses. So it means the disinvestment decisions were made in a hastily and unplanned manner.
  84. As a result of disinvestment, the total realization (revenue) of the government from various rounds of disinvestments has been much below the target. NO adequate efforts were made to build up the linkage between public enterprises and the capital market.
  85. During the disinvestment programme, the public equity has been under priced.
  86. Privatization can be achieved through (a) Franchising (b) Leasing (c) Contraction (d) Divesture.
  87. Under strategic sale method, disinvestment price would be market based and not pre fixed.
  88. Nationalization means purchasing of at least 26% share in a private company by the government.
  89. The predecessor of WTO was GATT. (General Agreement on Trade & Tariff)
  90. India is a member of WTO since April 2001.
  91. Globalization means integrating domestic economy with world’s economy. Its principal demerit is decreasing income for many companies in the face of global competition. E.g. Indian electronics companies facing competition from Chinese goods.
  92. The peak rate of custom duty was brought down to 10% in 2007-08.
  93. India achieved full convertibility in current A/C in August, 1994
  94. ADR- American Depository Receipts GDR- Global depository Receipt.
  95. TRIPs – Trade Related Intellectual Property Rights.
  96. MTA – Multilateral Trade Agreements
  97. Globalization got a real thrust from new economy policy 1991.
  98. Dual Exchange Rate System was from 1992-93.
  99. In 2012, India’s share in world export was 1.6%.
  100. The combined share of exports and imports of goods increased to 43% of GDP in 2011-12.
  101. Foreign Currency Reserve is USD 294 billion on March 2012.
  102. Export finance more than 80% of imports.
  103. The average growth of export has been more than 23 per cent per annum during the Tenth Plan.
  104. In 2011-12, the current account deficit reached at (-) 4.2% of GDP.
  105. Due to its commitments to WTO, Government of India cannot stop or avoid foreign competition from entering into India.
  106. At the end of March 2012, External Debt amounted to Rs. 17,50,000 Crores. (20% of GDP)
  107. The three economy pillars of economy dimensions are IMF, World Bank, WTO.
  108. International Monetary Fund (IMF) was organized in 1946 & commenced its operation in March, 1947.
  109. International Monetary Fund is affiliated to UNO (United Nation Organization).
  110. IMF, a short term credit institution, has 188 countries as its members. It is a reservoir of the currencies of all the member countries. It grants loan only for current transactions.
  111. World Bank [IBRD] is also called International Bank for Reconstruction & Development (IBRD). It was formed in 1945 in Bretton Woods(a place) & has 188 countries as its members. It provides Long Term Loans to its members for the development of their nations.
  112. World Bank consists of :
  113. International Development Association (IDA) [1960] It is known as “SOFT LOAN WINDOW” of the world bank because it gives “interest free” loans to poor countries.
  114. International Finance Corporation (IFC)
  115. Multilateral Investment Guarantee Agency (MIGA) [1988]
  116. International Center for settlement of Investment Disputes (ICSID) [1966]
  117. ICSID was founded in 1966, MIGA Created in 1988, IDA established in 1960.
  118. WTO came into existence on 1st January, 1995. It has 159 countries as its members.
  119. The decision-making is done through voting in WTO. Each member country has only one vote.
  120. WTO is the only international organization which takes care of the rules of trade between nations.
  121. WTO has been formed to act as a permanent watchdog on the international trade.
  122. It handles trade policies, trade disputes, forums for trade negotiations etc. It aims at reduction in tariffs through negotiations, elimination of import quotas and globalization of international trade.
  123. Trade disputes are handled through Disputes Settlement Body (DSB).

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Chapter – 8 Money and Banking

 

  1. Functions of Money in Static Sense, Money Serves:

As A Medium Of Exchange, As A Unit Of Account, As Standard Of Deferred Payments, As Store Of Value

  1. Functions of Money in Dynamic Sense, Money Serves:

Directs Economy Trends, as Encouragement to Division Of Labour, Smoothens Transformation Of Savings into Investments.

  1. To modern economists or empiricists, the crucial function of money is that it serves as a store of value.
  2. Fiat money – paper with no intrinsic value fulfills the functions of money because of government approval. So we can say it is backed by the govt.
  3. It means the paper note has no original (intrinsic) value of its own, the value is of the matter printed on it.
  4. For printing currency as per the RBI act. The minimum reserve to be kept aside by RBI is Rs. 200 crores. Out of this Rs. 115 crores worth of Gold and rest in foreign securities.
  5. For printing of currency RBI follows Minimum Reserve System.
  6. Classification of Money in 1979:
    1. M1 (Narrow Money) = Currency + Demand Deposits
    2. M2 =M1 + Post Office Saving Deposits
    3. M3 (Broad Money)= M1 + Time Deposit with Bank
    4. M4 = M3 + Total post Office deposits (excluding National Saving Certificates)
  7. The basic distinction between narrow money (M1) and broad money(M3) is in the treatment of time deposits with banks.
  8. In the present context, Money Stock in India refers to M3.
  9. The third RBI working group (1998) redefined its parameters. Classification of Money as per Latest parameters:
    1. NM1 = Currency + Demand deposits + Other deposits with RBI
    2. NM2 = NM1 + Time liabilities portion of saving deposits with banks + certificates of deposits issued by banks + Term deposits maturing within a year excluding FCNR(B) [foreign currency non residential bank deposits
    3. = NM2 + Term deposits with banks with maturity over one year + call / term borrowings of the banking system. [M4 is excluded]
    4. [[Please note that I have written ‘NM1, NM2…’ headings for the above three definitions only to differentiate it from the traditional definitions. The new definition of money terms then as M1, M2 only.]]
  10. So, definition of currency includes currency, demand deposits, other financial assets but not any foreign exchange. (see point B above).
  11. The lockers or safe deposits do not make a part of the deposits of the bank. As the bank is only the custodian of those lockers and charges a fee for their maintenance.
  12. Commercial banks are called as creators of money because their loans create deposits in the economy.
  13. Banks are able to create credit on the basis of the cash deposits of public with them.
  14. Credit creation means creating greater amount of credit than the actual deposits with the banks.
  15. This means that during depression deposits are small so credit creation will also be in small quantity.
  16. During the periods of boom (prosperity) the credit creation will be heavy.
  17. In other words Credit creation done by commercial banks increases the supply of money in the economy.
  18. Though RBI can influence the volume of this credit creation done by commercial banks in India.
  19. Cheque is an example of credit money as you can give post dated cheques to your clients.
  20. Security holdings held by bank as a guarantee against loans given to the public does not create any liability on the commercial banks.
  21. Rather, the loans given to the public are the assets for the banks.
  22. Banks can also earn through discounting the bills of exchange.
  23. The discount is bank’s earning while dealing with bills of exchange.
  24. When Banks finance the small-scale sectors like agriculture, SSI etc. it is termed as Directed Credit.
  25. Banking system has the capacity to add to the total supply of money by means of credit creation.
  26. At the time of independence, India had more than 645 banks with more than 4800 branches.
  27. Nationalization of commercial banks – July 1969- 14 Banks, 1980 – 6 Banks
  28. Nationalization was done to remove private ownership of banks, remove urban bias and prevent violation of rules & regulations done by these banks (as they were under private ownership)
  29. At present – 19 Nationalized banks as per latest CA module.
  30. Commercial banks in India include Scheduled banks (banks which have been included in the second schedule of RBI Act 1934) and non scheduled banks.
  31. Scheduled banks comprises of State Bank of India and its associates, Nationalized banks, Foreign banks, Regional Rural Banks and other schedules commercial banks.
  32. Scheduled bank is a bank which is authorized by the RBI to do core banking business, foreign exchange transactions, etc.
  33. Cooperative banks are not scheduled banks.
  34. Nationalized bank is a scheduled bank owned and operated by the government of India.
  35. SBI State bank of India is the biggest commercial Bank in India.
  36. Prior to nationalization, out of about 5.6 lacs villages in India, only 5000 were being served by commercial banks.
  37. A scheduled bank is one which should have a minimum of Rs. 5 lakh as paid up capital and reserve fund. It has to submit weekly return to RBI. Further, it has to follow all the rules and regulations laid down by RBI from time to time.
  38. Nationalized banks can also be a scheduled bank sometimes. As you can see in point 25, beside nationalized bank there are other categories also included in scheduled banks.
  39. Five major cities (Ahmadabad, Bombay, Calcutta, Delhi & Madras) together had one-seventh share in the number of bank office and about fifty percent share o of bank deposit and bank credit.
  40. Agriculture accounted for only 2.2% of total advances.
  41. The number of branches in 2012 has increased to 98,591.
  42. Population per bank office was 12,500 in 2012.
  43. The % of rural bank branches – 37% in June 2012.
  44. The aggregate deposit of commercial banks increased to RS. 60,00,000 crores in 2012.
  45. Maharashtra leads all other status and accounts, for around 22% of the aggregate deposits received by the bank. [Delhi, U.P, WB, Karnataka, Tamil Nadu and AP together constitute 67%].
  46. In terms of deposit mobilization Bihar leads other states.
  47. Bank lending is about RS. 50,00,000 crores in Dec 2012.
  48. Customers’ deposits in banks are a liability to the banks and not their assets.
  49. The percentage of lending to priority sectors by commercial banks has gone to 41% in March 2012.
  50. Rural areas have just 37% of the bank branches but more than 70% of the population residing there.
  51. NPA means Non Performing Assets.
  52. Bank deposits been done by public is known as Bank Money.
  53. It means those loans and advances given by banks to the individuals or firms which they are unable to recover even after repeated efforts.
  54. Loans & advances are most profitable for banks but they are the least liquid assets.
  55. Commercial Banks in India suffer from many problems like Regional imbalances, Increasing over-dues, Lower efficiency, inadequate manpower etc.
  56. ICICI – Industrial Credit and Investment Corporation of India.
  57. As a percentage of Gross Advances, Gross NPA has fallen to 2.94% in 2011-12.
  58. Every country has a central bank. In India it is known as the Reserve Bank of India.
  59. It was formed in 1934 through the RBI ACT, 1934.
  60. It got nationalized in 1949 under the Banking Regulation Act, 1949
  61. Under both the above acts, RBI has got powers to control and supervise the functioning of the commercial banks in India.
  62. Professor Raymond P. Kent defined Central Bank as, “An institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of the general public welfare.
  63. Professor R.C. Hawtrey advocated that the most essential feature of the central bank is as the lender of the last resort.
  64. One Rupee Note is signed by Secretary, Ministry of Finance.
  65. A 100 Rupee note is signed by RBI Governor.
  66. It performs various functions like issuer of currency, banker to the government, banker’s bank, controller of credit, custodian of foreign exchange reserves and lender of the last resort.
  67. RBI also performs various promotional functions.
  68. Many functions are now handed over to NABARD (agriculture), EXIM BANK (Exports) & SIDBI [Small Industrial Development Bank of India] (for SSI)
  69. RBI has developed long term financial institutions like IDBI, IFCI, ICICI for the development of various sectors of our country.
  70. Regional Rural Banks were introduced to help the rural people in fulfilling their credit needs other than agricultural. At present, 196 RRBs are working in India.
  71. The RBI makes advances to the Central and State Government which are repayable within 90 days from the date of advance.
  72. A cheap (low rate) Credit policy promotes investment.
  73. RBI does not deal with general public under normal circumstances.
  74. RBI can affect the monetary structure of Indian economy by changing the elasticity of money.
  75. It means it can increase or decrease the value of currency because it has the monopoly power of printing the currency.
  76. Issues related to Public Finance is controlled by the Government and issues related with monetary affairs are under the control of RBI.
  77. Issuing one rupee note is the duty of Government of India.
  78. Bank Rate – The rate at which the RBI discounts bills of exchange held by commercial banks.
  79. To control inflation RBI increases Bank rate.
  80. To encourage investment in the country Bank rate will be decreased.
  81. At present Bank Rate is 10.25%.
  82. CRR – %age of deposit amount to be kept with RBI
  83. CRR is usually determined by the Apex monetary authority of India – RBI.
  84. SLR – %age of deposit amount to be kept with the banks themselves but in form of liquid assets.
  85. At present, CRR is 4% & SLR is 23% [July 2013].
  86. Repo Rate – The rate at which banks take loan from RBI.
  87. Reverse Repo Rate – The rate at which RBI takes loan from the banks.
  88. There is always 100 basis points (1%) difference between Repo rate and reverse repo rate.
  89. Repo Rate is 7.25% & Reverse Repo Rate is 6.25%.(July 2013).
  90. RTGS means Real Time Gross Settlement.
  91. Monetary policy is also known as credit policy. It is implemented by RBI in two ways – Quantitative (volume of credit) and Qualitative (direction of credit).
  92. Quantitative Methods of credit control – Bank Rate policy, Open Market Operations (OMO), CRR, SLR, Repo Rate and Reverse Repo Rate
  93. These Quantitative controls affect all the sectors of the economy unbiased.
  94. Under OMO, if the RBI purchases the Bonds (issued previously to the public) from the public then it will increase the money supply in the market. It will also decrease the interest rates of the banks.
  95. RBI itself decreases the rates to discourage bank deposits.
  96. Rather, the government wants people to spend their money in the market to boost the economy.
  97. When deficit financing (printing of new currency) increases, then RBI increases CRR to control excess liquidity occurred in the market in order to control inflation.
  98. Qualitative Methods of credit control – Margin Requirements, consumer credit regulation, issue of directives, rationing of credit, moral suasion and direct action.
  99. Qualitative Measures are also known as Selective Credit Control
  100. Margin Requirement means the difference between the value of the security given to the bank by an individual or firm and the actual loan amount he gets in lieu of that security.
  101. g. Mr. X mortgaged his property worth Rs. 1 Crores with the bank and in return he got Rs. 70 lakhs loan. Then the margin requirement in this case is Rs. 30 lakhs.
  102. Moral Suasion means persuasion on moral grounds without coercion or force. A sort of requesting for cooperation by the RBI to the commercial banks.
  103. Direct Action means punishment or fine can be slapped upon any bank which does not follow the instructions of RBI.
  104. To control inflation and discourage investment during inflationary periods – increase bank rate, sale of securities in the open market (to the public in general), increase the CRR and SLR.
  105. To control deflation and encourage investment during deflationary periods – decrease bank rate, purchase of securities from open market, decrease CRR and SLR.
  106. Hence it can be said that the above mentioned steps (point 80) taken by RBI are anti-inflationary.
  107. The steps (point 81) are inflationary measures.
  108. Devaluation is not used as a tool to control the credit in the country.
  109. RBI tries to discourage hoarding of money (e.g. people saving money at home and not depositing it in bank – this is called leakage of currency from the economy) because it decreases the money supply in the economy.

IMPORTANT ABBREVIATIONS OF CA CPT ECONOMICS

Chapter – 5

S.No Year Abbreviation Full Forms
1. NSSO National Sample Survey Organization
2. HDI Human Development Index [Constructed by UNDP]
3. UNDP United Nations Development Programme
4. NNP Net National Product
5 GDP Gross Domestic Product
6 WDR World Development Report
7 CMIE Centre For Monitoring  Indian Economy
8 1949 RBI Reserve Bank of India
9 1966 GR Green Revelation
10 HYVP High Yielding Varieties Programmes
11 IRDA Integrated Rural Development Programme
12 JRY Jawahar Rozgar Yojna
13 FASAL Forecasting Agricultural Output Using Space, Agro-meteorology And Land-Based Observation
14 NFSM The National Food Security Mission
15 RKVY The Rashtriya Krishi Vikas Yojna
16 ERFS Extended Range Forecasting System
17 1975 RRBs Regional Rural Banks
18 1982 NABARD National Bank For Agriculture & Rural Development
19 2004 Farm Credit Package
20 1998 Kisan Credit Card
21 2008-09 Agricultural Debt Waiver and Debt Relief Scheme 2008
22 Department of Agriculture & Cooperation
23 APMC Agricultural Product Market Committee Act
24 ACABC Agri Clinics & Agri Business Centres
25 KKMS Kisan Knowledge Management System
26 2007 National Policy For Farmers, 2007
27 2006 MSMED Act Micro, Small & Medium Enterprises Development Act
28 ICOR Incremental Capital Output Ratio.
29 BPO Business Process Outsourcing.
30 NDP Net Domestic Product
31 NFIA Net Factor Income From Abroad
32 Soviet Union Commonwealth of Independent States.
33 1860 Income Tax Introduced
34 1873 Income Tax Discontinued
35 1886 Income Tax Reintroduced
36 1953 Estate Duty Introduced
37 1985 Estate Duty Abolished
38 1957 Wealth Tax Introduced
39 01.04.1993 Wealth Tax was abolished in all assets except  some specific assets
40 1958 Gift Tax was introduced
41 1998 Gift Tax Abolished
42 Ap.2005 Gift Tax Partially introduced
43 1986-87 MODVAT Modified Value Added Tax.
44 2000-01 CENVAT Central Value Added Tax.
45 1999 VAT Value Added Tax
46 2005 VAT was implemented
47 1994-95 Service Tax was introduced
48 The Booth Lingam Committee and Chelliah Committee Recommended simplification and rationalization of tax system in India
49 FYPs Five- Year Plans
50 MSA Maximization of Social Advantage
51 MW Mega Walt
52 NH National Highway
53 NIXI National Internet Exchange of India
54 NSAP National Social Assistance Program

 

Chapter-6

S.No. Year Abbreviation Full Form
1. 1966 Family Planning
2. 2000 NPP National Population Policy
3. 1921 Year of Great Divide
4. ISM Indian System of Medicine
5. TRF Total Fertility Rate
6. MMR Maternal Mortality Rate
7. IMR Infant Mortality Rate
8. URP Uniform Recall Period
9. MRP Mixed Recall Period
10. Dec 2000 PMGSY Pradhan Jayanti Gram Swarozgr Yojana
11. Dec 2006 lAY Indira Awas Yojna
12. April 1999 SJGSY Swaran Jayanti Gram Swarozgar Yojana
13. MWS Million Wells Scheme
14. IRDP Interated Rural Development Programme
15. 2001 SGRY Sampoorna Grameen Rojgar Yojana
16.  

EAS

Employment Assures Scheme
17. JGSY Jawahar Gram Sammridhi Yojna
18. Nov. 2004 NREGS National Rural Employment Guarantee Scheme
19. Dec. 1997 SJSRY Swarna Jayanti Shankari Rojgar Yojana
20. NFFWP National Food For Work Programme
21. NRY Nehru Rozgar Yojana
22. PMGY Pradhan Mantri Gramodya Yojana
23. PMRY Prime Minister’s Rozgar Yojana
24. UBSP Urban Basic Service  Program
25. PMIUPEP Prime Minister’s Integrated Urban Poverty Eradication Programme
26. LFPR Labour Force Participation Rate
27. WFPR Work Force Participation Rate
28. CWS Current Daily Status
29. CDS Current Weekly Status
30. PU Persons Unemployed
31. SETUP Self Employment Program for Urban Poor
32. MTA Mid-Term Appraisal
33. UPS Usual Person Status
34. SME Small and Medium Enterprises
35. NTPC National Thermal Power Corporation
36. NHPC National Hydro Electric Power Corporation
37. NPCIL Nuclear Power Corporation of India Limited
38. SEB State Electricity Board
39. CERC Central Electric Regulatory Commission
40. CEA Central Electricity Authority
41. OPEC Organization of Petroleum Exporting Countries
42. POL Petroleum. Oil and Lubricants.
43 PLF Plant Load Factor
44. T&D Transmission & Distribution
45. SPU States Power Utilities
46. 2002-03 APDRP Accelerated Power Development and Reform Programme
47. 2005 RGGVP Rajiv Gandhi Grameen Vidyuttikaran Programme
48 BPL Below Poverty Line
49. CFL Compact Fluorescent Lamps
50. 2003 Electricity Amendment Bills 2005
52 2005 Electricity Amendment Bills 2005
52. 2007 Electricity (Amendment) Act 2007
53. At & T Aggregate Technical and Commercial
54. BEE Bureau of Energy Efficiency
55. PPP Public Private Partnership
56. NHDP National Highway Development Program.
57. 2001 AMPC Automatic Mail Processing Centre
58. VSAT Very Small Aperture Terminals
59. APT Village Public Telecome (telephone)
60. PCO Public Call Office
61 BSNL Bharat Shanchar Nigam Limited
62. MTNL Mahanagar Telephone Nigam Limited
63. VSNL Videsh Sanchar Nigam Limited
64. TRAI Telecom Regulatory Authority of India
65. NIEI National Internet Exchange of India
66. GER Gross Enrolment Ratio
67. 1986 NPE The National Policy on Education
68. 2001-02 SSA Surve Shiksh
69. NPEGEL National Pragramme of Education of Girl of Elementary Level
70. EGS Education Guarantee Scheme.
71. AIE Alternative And Innovative Education
72. KGBV Kasturba Gandhi Balika Vidylaya
73. PSK Parambhik Shiksha Kosh
74. NIT National Institute  Technology
75. IISER Indian Institute of Science Education And Reserve
76. NIIE National Institute of Industries Engineering
77. IIFT Indian Institute of Foreign Trade
78. IIM Indian Institute of Management
79. ISM Indian School of Mines
80. 1998 NLM National Literacy Mission
81. 1998 TLC Total Literacy Campaign
82. CEC Continuing Education Center
83. WPI Wholesale Price Index
84. CPI Consumer Price Index
85. OMO Open Market Operation
86. SRR Statutory Reserve Requirement
87. 2000[Bill] FRBM Fiscal Responsibility and Budget Management Act (pass in 2003)
88. BOP Balance of Payment
89. BOT Balance of Trade
90. DTC Delhi Transport Corporation
91. IMF International Monetary Fund
92. DWCRA The Pragram of Development of Woman and Children in Rural Areas
93. FCI Food Corporation of India
94. GRT Gross Registered Tonnage
95. VKUY Vishesh Krishi Upaj Yojana
96. UNDI United Nations Development Index

 

Chapter-7

S. No. Year Abbreviation Full Form
1. DGTD Director General of Trade & Development
2. FDI Foreign Direct Investment
3. NRI Non-Resident Indian
4. OCB Overseas Corporate Body
5. SEZ Special Economic Zones
6. LNG Liquefied Natural Gas
7. MRTP Act Monopolistic and Restrictive Trade Practices Act
8. 1991 NIP New Industrial Policy
9. CRR Cash Reserve Ratio
10. SLR Statutory Liquidity Ratio
11. PLR Prime Lending Rates

 

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