INDIAN ECONOMY

By
SIBIL MANHA
sibilmanha@[Link]
 SYLLABUS

Economic and Social Development – Sustainable

Development, Poverty, Inclusion, Demographics,
Social Sector initiatives, etc.
 TOPICS

NATIONAL INCOME BANKING

FISCAL POLICY TAXATION

INFLATION EXTERNAL SECTOR

MONETARY POLICY FINANCIAL MARKETS

 WHAT IS ECONOMICS?

Our Desires Are But The Resources

Unlimited Are Limited

In its most simple and concise definition, economics is the study of how
society uses its limited resources.

Economics is a social science that deals with the production, distribution,

and consumption of goods and services.
 WHAT IS ECONOMY?

Economics is the theoretical framework.

Economy is it’s practical application in a
jurisdiction or area.

As Economy is the application of economic theory in a

jurisdiction, we usually add the jurisdiction as a prefix to
economy. For eg: Indian economy or European
Economy
 RETURN ON FACTORS OF
FACTORS OF PRODUCTION
PRODUCTION

LAND RENT

LABOUR WAGES

CAPITAL INTEREST

ORGANISATION PROFIT
FLOW OF INCOME
 TYPES OF ECONOMY

CAPITALIST ECONOMY

There are 3 important questions which

help us identify the type of economy.

SOCIALIST ECONOMY WHAT TO PRODUCE?

HOW TO PRODUCE?
FOR WHOM TO PRODUCE?

MIXED ECONOMY
 SECTORS OF THE ECONOMY

PRIMARY SECTOR QUARTERNARY SECTOR

SECONDARY SECTOR QUINARY SECTOR

TERTIARY SECTOR
 NATIONAL INCOME - GDP

Gross Domestic Product (GDP) – It is the total value of all final

goods and services produced within the territory of a country in
a particular financial year.
 GDP

Value here refers to Money Value. The amount for which the goods or
services are sold in the market. In GDP calculation we take the total
money value of goods and services produced in the country.

For eg: Suppose there’s an economy which produce just chairs. If price of
one chair = Rs. 1000, and if they produced 100 chairs, then GDP of that
economy = Rs. 1,00,000.
 GDP

FINAL GOODS AND SERVICES: Final goods are those which are consumed by
the final consumer. That is, it is not used for further production. Goods used
for further production are referred to as Intermediate goods.

For eg: Suppose you purchased tomato for making tomato curry or
tomato puree. You’re purchasing it for consumption. So it is a final good in
this case.

If Kissan Co. purchases tomato to make Ketchup, it is an

intermediate good as they are using tomato for further
production.
 GDP

GDP is a territorial concept. That is, here we calculate the value of

all goods and services produced within the country. It doesn’t give
importance to who is producing, it just give importance to from
where it is produced.

For eg: If Apple manufacture iPhones from India, then it will be

included in India’s GDP even though Apple is an American
company.

If Tata manufacture automobile from Latin America, it will not be

included in India’s GDP even though Tata is an Indian company.
 GDP

FINANCIAL YEAR: usually GDP is calculated for one year.

Financial year in India is from April 1st to March 31st.
 GNP

Gross National Product (GNP): Here we calculate the value of all goods and services
produced by Indian Nationals from around the world. Here, it is a nationality concept
rather than territorial concept.

GNP = GDP + Net Factor Income from Abroad

Net factor Income = Factor Income received by Indians – Factor Income paid by
Indians.

Factor Income = 20cr

INDIA
REST OF THE
WORLD GDP=100cr
Question
Factor Income = 40cr
What will be the
GNP in this
case?
 NNP

Net National Product (NNP): Here, from GNP we will be deducting

depreciation. Depreciation is general wear and tear that occurs to
capital goods.
NNP = GNP - Depreciation
 Factor Cost and Market Price

Business will have to pay indirect Government provide subsidy to

taxes on goods and services they sell. companies to promote them. Eg:
For eg: Sales tax Electricity subsidy

NNP at Market Price is the prices at which goods are available in the
market.
NNP at Factor Cost is the price of factors of production. It doesn’t
include taxes or subsidies related to the product.

NNP at Market Price = NNP at FC + Indirect taxes -

Subsidies
 Methods of Calculating GDP

INCOME METHOD

EXPENDITURE METHOD

OUTPUT METHOD
 INCOME METHOD

RENT WAGES INTEREST PROFIT

There are some changes in the way we calculate it now as we

adopted the United Nations National System of Accounting.

Income method GDP = Compensation to Employees +

Consumption of Fixed Capital + Mixed Income/Operating Surplus.
 EXPENDITURE METHOD

EXPENDITURE METHOD = CONSUMPTION + INVESTMENT + GOVERNMENT EXP

CONSUMPTION INVESTMENT GOVERNMENT

• DURABLE GOODS • BUSINESS FIXED • GOODS
• NON DURABLE GOODS • RESIDENTIAL UNIT • SERVICES
• SERVICES • PUBLIC
• INVENTORY
 OUTPUT METHOD

It is also referred to as Value Added Method. Here we calculate

value added at each stage.

For eg: A Farmer grows wheat and sell it for Rs.100 to a Mill. A Mill
grounded it and sold it to a Bake House for Rs. 150. Here the value
added by the Mill is Rs. 50. Now Bake House uses the flour to bake a
cake. They sold the cake the ultimate Consumer at Rs. 250.

VALUE ADDED Rs.50 Rs.100

Rs.100 Rs.150 Rs.250

 OUTPUT METHOD

When we calculate GDP using the output method, we get the Gross
Value Added (GVA) at Factor Cost.

GVA at Basic Prices = GVA at Factor Cost + Production Taxes –

Production subsidies.
GDP = GVA at Basic Prices + Product Taxes –
Product Subsidies
 Real GDP and Nominal GDP

Nominal GDP is GDP calculated at Current Prices. Current

Prices are the market price at which goods are currently
sold in the market.

Real GDP is GDP calculated at Base Price or Constant Price.

Base Price is the price at which goods were sold in the base
year.
 GDP Deflator

The GDP deflator, also called implicit price deflator, is a measure of

inflation. It is the ratio of the value of goods and services an economy
produces in a particular year at current prices to that of prices that
prevailed during the base year.
 Items Excluded in GDP

PURELY FINANCIAL
ENVIRONMENTAL COST
TRANSACTIONS

SALE OF SECOND HAND

OPPORTUNITY COST
GOODS

NON-MARKETABLE GOODS
AND SERVICES

ILLEGAL ACTIVITIES
GDP

Green GDP is a term used generally for

expressing GDP after adjusting for
environmental damage.
 GDP - Trends

India
China
Brazil
Other emerging
Economies

Year 2015 2016 2017 2018 2019

GDP
8 8.2 7.2 6.8 6.1
Growth
GDP - Trends

India's economy is the fifth largest in the world with a

GDP of USD 2.94 trillion, overtaking the UK and France
in 2019 to take the fifth spot.
 GDP - Trends

The big mac index was invented by The Economist in 1986 as a lighthearted
guide to whether currencies are at their “correct” level.

It is based on the theory of Purchasing-Power Parity (PPP). PPP measures

the prices of same basket of products in different countries which allow us to
find out whether the exchange rate is properly valued or not.

India is the 3rd Largest Economy in the World in PPP terms.

For eg: The price of 1 Kg Apple in India is Rs.50. The price of 1 Kg

Apple of same variety is $1. That means, based on PPP,
$1 = Rs.50
 FISCAL POLICY

Fiscal policy is the means by which a

government adjusts its spending levels and
tax rates to monitor and influence a nation's
economy.

Government implements its fiscal policy with

the help of annual budget.
Types of Fiscal Policy
 FISCAL POLICY

Government
Budget

Revenue
Capital Budget
Budget
Revenue Revenue Capital Capital
Receipts Expenditure Receipts Expenditure

Tax Non-Tax
Revenue Revenue

Direct Tax Indirect Tax

 Capital Account

CAPITAL RECEIPTS – All those receipts which

either lead to decrease in assets or increase in
liabilities.

Assets Liabilities

CAPITAL EXPENDITURE – All those

expenditures which either lead to increase in
assets or decrease in liabilities.

Assets Liabilities
 Revenue Account

Revenue Receipts and Revenue Expenditure do not

create any change in Assets or Liabilities of the
Government.

For eg: Wages/Salaries paid by the government do

not create any change in assets or liabilities. Thus can
be considered as Revenue Expenditure.
 EXAMPLES

Let’s Solve
Paying interest on
Loan from USA
Loan from USA

Purchasing bullets Subsidy payment

Grant given by
Loan to Bangladesh
Centre to States

Painting Profit from PSU’s

Government office

Building a Hospital Repayment of loan

 REVENUE DEFICIT

REVENUE DEFICIT = Revenue Expenditure – Revenue Receipts

Revenue Deficit is not considered useful for the economy. It does not
create any long term assets and does not propel future growth. Money is
spent for consumption.

2018-19 2019-20 2020-21

2.4% 2.4% 2.7%
 Effective Revenue Deficit

Effective Revenue Deficit = Revenue Deficit – Grants used for creation

of Capital Assets

For eg: If suppose 100cr grant is given to the states by the

Centre. Out of that 20cr is used for building a new hospital.

Effective Revenue Deficit here will be 100cr – 20cr = 80cr

 FISCAL DEFICIT

FISCAL DEFICIT = Total Expenditure – Revenue Receipts + Non-Debt

creating Capital Receipt

Let’s find Fiscal

Let’s take an Example:
Deficit

You are getting a Salary Rs.50,000

You gave the rent Rs.10,000

Your food and miscellaneous Rs.15,000

expense is
You bought a mobile phone Rs.70,000

Sold your watch Rs.20,000

Took loan from friend Rs.25,000

Fiscal Deficit - Trends
Fiscal Deficit - Trends
Fiscal Deficit – Current Scenario
 PRIMARY DEFICIT

PRIMARY DEFICIT = Fiscal Deficit – Interest Payment Stats Corner

India’s Interest Payment is

around 6% of GDP.
 DISINVESTMENT

Disinvestment means sale or liquidation of assets by the government, usually

Central and state public sector enterprises, projects, or other fixed assets.

The government undertakes disinvestment to reduce the fiscal burden on the

exchequer, or to raise money for meeting specific needs, such as to bridge the
revenue shortfall from other regular sources.

Strategic disinvestment is the transfer of the ownership and

control of a public sector entity to some other entity
(mostly to a private sector entity)
Disinvestment – Trends
 Fiscal Policy - Terms

FISCAL CONSOLIDATION – It is a process where government's fiscal health is

getting improved and is indicated by reduced fiscal deficit.

Improved tax revenue realization and better aligned expenditure are the
components of fiscal consolidation as the fiscal deficit reaches at a
manageable level.

PUMP PRIMING – It is the action taken to stimulate an economy, usually

during a recessionary period, through government spending and interest rate
and tax reductions.

CROWDING OUT – It takes place when the government, increases its

borrowing. The sheer scale of this borrowing can lead to substantial rises in
the real interest rate, which has the effect of absorbing the economy's
lending capacity and of discouraging businesses from making capital
investments.
 Fiscal Policy – Terms

FISCAL DRAG is normally associated with progressive tax rates.

Because of progressive taxes, the government will get more
taxes when the economy is booming. This also helps slow the
rate of increase in demand, reducing the pace of growth

Fiscal drag may happen due to inflation or fiscal policies of the

government.

FISCAL CLIFF - A sudden condition of high taxes and reduced

public expenditure after a long period of tax cuts and liberal
public expenditure is known as Fiscal Cliff.
 Fiscal Policy - Terms

CROWDING IN - If the government spends the borrowed

money on infrastructure, it can have a multiplier effect on
investment, tax collection and growth. It is called crowding in of
corporate.

Importance of
Government Spending
 Issues with Fiscal Deficit

CROWDING OUT

INFLATION

POOR FISCAL MANAGEMENT

HIGH LEVELS OF DEBT

FRBM Act
 FRBM, Act

BUDGET 2018-19 has proposed amending the FRBM Act again.

This will shift the target of 3% fiscal deficit-gdp ratio to end-march 2021.

DEBT - The general DEBT-GDP ratio is slated to be reduced to 60% of the GDP
by 2024-25.

The central government DEBT-GDP ratio is to be reduced to 40% of the GDP

by 2024-25.

These targets are based on the recommendations of the FRBM review

committee.

However, the committee's target of 2022-23 is shifted to 2024-25. They did

not accept committee’s recommendation of appointing Fiscal Council.

Revenue deficit targets (0.8%) are also not adopted by the government
Budgetary Targets
 INFLATION

Rise in general level of Prices over a sustained period

of time is known as INFLATION. It should not be
confused with rise in prices of few products.

Decline in general level of prices is referred to Deflation

or Disinflation.
 What happens during Inflation?

With increasing prices, value Reduction in Purchasing

of money will reduce power of the people

So you know the

reason why your
Grand Parents say
that Rs.1000 was
actually a
significant amount
back then
 CAUSES OF INFLATION

Demand Pull Inflation occurs when demand

of product increases more than it’s supply.
For eg: Prices of vegetables.

Cost Push Inflation occurs when cost of

production increases the prices of product.
For eg: Prices of oil.

Structural Inflation is caused due to the

operation of the structural weakness (supply
bottleneck, lack of infrastructure, etc.)
existing in a developing economy.
TYPES OF INFLATION

Creeping Inflation

Walking Inflation

Galloping Inflation

Hyper Inflation
 Headline and Core Inflation

Headline inflation is a measure of the total inflation within an economy,

including commodities such as food and energy prices (e.g., oil and gas), which
tend to be much more volatile and prone to inflationary spikes.

Core inflation is the change in the costs of goods and services but does not
include those from the food and energy sectors. This measure of inflation
excludes these items because their prices are much more volatile.
 Inflation - Terms
INFLATION SPIRAL

An inflation tax is the economic

disadvantage suffered by holders
of cash and cash equivalents in
one denomination of currency due
to the effects of inflation, which
acts as a hidden tax that subtracts
value from currency.

Inflation premium
It is the bonus brought by inflation to the borrowers.
Banks charge nominal interest rate on lending and
inflation rate is not taken into account.
 Inflation - Terms

The theory states that the higher the rate of inflation, the
lower the unemployment and vice-versa. Thus, high levels of
employment can be achieved only at high levels of inflation.
However, the implications of Phillips curve have been found to
be true only in the short term.

Stagflation is a condition described by

slow economic growth and relatively
high unemployment, or economic
stagnation, which is at the same time
accompanied by rising prices (i.e.
inflation).
 Inflation - Terms

Skewflation is a situation in which there is a price rise of one or a

small group of commodities over a sustained period of time.

For eg: Increases in prices of Onion, usually seen in last few years.

Reflation is the act of stimulating the economy by increasing the

money supply or by reducing taxes, seeking to bring the economy
back up to the growth trajectory. It is the opposite of disinflation,
which seeks to return the economy back down to the high demand
path.
Inflation Targeting
Base Effect
 Wholesale Price Index

Wholesale Price Index, or WPI, measures the changes in the prices of

goods sold and traded in bulk by wholesale businesses to other businesses.
To put it simply, the WPI tracks prices at the factory gate before the retail
level.

The numbers are released by the Economic Advisor in the Ministry of

Commerce and Industry on a monthly basis

WPI has a sub-index called WPI Food Index, which is a combination of the
22.62 Food Articles from the Primary Articles basket, and the food products from
the Manufactured Products basket.

64.23 13.15
WPI – Trends

March 2020
00.9%
 Consumer Price Index

CPI (Combined) Weights Consumer Price Index or CPI as it is commonly called is an index
measuring retail inflation in the economy by collecting the change
in prices of most common goods and services used by consumers.
28.32

The Central Statistics Office (CSO) which is now the National

Statistical Office (NSO) compiles this data.
45.86

10.07

6.84
6.53

2.38

Food and Beverages Pan, Tobacco Clothing and footwear

Fuel and Light Housing Miscallaneous
 NNP

CPI (Combined) Weights CPI (Combined) Weights

27.26 29.53
36.29

0 54.18
7.94

7.36 21.67 5.57

5.58 1.36

3.26

Food and Beverages Pan, Tobacco Food and Beverages Pan, Tobacco
Clothing and footwear Fuel and Light Clothing and footwear Fuel and Light
CPI
 CPI

CPI for Industrial Workers (CPI-IW) It tries to measure the changes over a period
of time on the prices of a fixed basket of
goods and services used by Industrial
Workers.
Central Statistical
TheOffice (CSO)group
target and National
would Sample
be anSurvey
average
Office under theworking-class
Ministry of Statistics and seven
family from Programme
sectors of the
Implementationeconomy
(MOSPI) into a singlefrom
ranging [Link], mines,
The new mergedplantation,
entity has motor
been named the National
transport, Statistical
port, railways to
Office (NSO) andelectricity
will continue to be headed
generation by the secretary of
and distribution.
MOSPI.
Compiled by the Labour Bureau.

CPI for Agricultural Labourers (CPI-AL) It is compiled by the Labour Bureau to revise
minimum wages for agricultural labourers in
different States.

CPI for Rural Labourer (CPI-RL) It is compiled by the Labour Bureau.

CPI – Trends

March 2020,
5.91 %
 MONETARY POLICY

It involves management of money supply and interest rate and is

the demand side economic policy used by the central bank of a
country to achieve macroeconomic objectives like inflation,
consumption, growth and liquidity.
 MONETARY POLICY

Two types of Monetary policy are, Contractionary and Expansionary Monetary policy. It is also
referred to as Tight Money Policy and Easy Money Policy respectively.

Tight Monetary Policy

MONETARY POLICY
 MONETARY POLICY TOOLS

• Repo Rate
• Reverse Repo
• Bank Rate
• Marginal Standing
Facility
 Cash Reserve Ratio

Stats Corner

Current CRR is 3% of Net

Demand and Time
Liabilities.

• The Reserve Bank of India or RBI mandates that banks store a proportion of
their deposits in the form of cash so that the same can be given to the bank’s
customers if the need arises.
• The percentage of cash required to be kept in reserves, vis-a-vis a bank’s
total deposits, is called the Cash Reserve Ratio.
• Banks do not get any interest on the money that is with the RBI under the
CRR requirements.
Statutory Liquidity Ratio

Stats Corner

Current SLR is 18%.

Banks have to maintain a stipulated proportion of their

net demand and time liabilities in the form of liquid
assets like cash, gold and government securities

Banks have to report to the RBI every alternate Friday

their SLR maintenance, and pay penalties for failing to
maintain SLR as mandated.
 Open Market Operations

• Open market operations is the sale and purchase of

government securities and treasury bills by RBI or
the central bank of the country.
• The objective of OMO is to regulate the money
supply in the economy.
• RBI carries out the OMO through commercial banks
and does not directly deal with the public.
• OMO is one of the tools that RBI uses to smoothen
the liquidity conditions through the year and
minimise its impact on the interest rate and
inflation rate levels.
 Repo and Reverse Repo Rate

Repo rate: It is the rate at which the central bank of a

country (Reserve Bank of India in case of India) lends
money to commercial banks in the event of any shortfall of
funds. Repo rate is used by monetary authorities to control
inflation.

Reverse repo rate: It is the rate at which the central bank of

a country (Reserve Bank of India in case of India) borrows
money from commercial banks within the country. It is a
monetary policy instrument which can be used to control
the money supply in the country.

Stats Corner

Current Repo Rate is 4%.

Reverse Repo is 3.35%
 Bank Rate

Higher Bank Rate signifies Tight Money

Policy were, RBI is trying to reduce the
overall money supply

Lower Bank Rate signifies Easy Money

Policy were, RBI is trying to increase the
overall money supply

Stats Corner
Bank rate is the rate at which RBI provide
Current Bank Rate is Long-term loans to the banks. Interest rate
4.25%. for long-term loans will be high.
 Marginal Standing Facility

• The MSF was introduced by the RBI in its monetary

policy for 2011-12.
• Under MSF, a bank can borrow one day loans from
the RBI, even if it doesn’t have any eligible securities
excess of its SLR requirement (maintains only the
SLR).

Stats Corner

Current MSF rate is

4.25%.
 Market Stabilisation Bond

MSS (Market Stabilisation Scheme) securities are issued with the objective of
providing the RBI with a stock of securities with which it can intervene in the
market for managing liquidity.

These are special bonds floated on behalf of the government by the RBI for
the specific purpose of mopping up the excess liquidity in the system when
regular government bonds prove inadequate. These are mostly shorter-
tenure bonds, of less than six months maturity.

The money procured from selling bonds under MSS are kept
with the RBI.
Here, for the interest payment, the government allocates
money from its budget to the RBI.
 Term Repo Rate

• A term repo is a repo of more than one-day duration. The word term denotes longer period.
• The loan seeking bank should submit securities to the RBI. Since the loan is for more
duration, the bank should give higher interest than the repo rate.

• Under the RBI’s new restructured liquidity framework, the term repo is
named as Variable Rate Term Repo.
• It is called variable rate repo because the interest rate is varied
depending upon the auction rate.
• The usual durations of Term Repo are 7 days, 14 days and 28 days.
• The auction amount will be within 0.75 % of the total deposit in the
banking system.
 Long Term Repo Operation

• Long Term Repo Operation (LTRO) is a mechanism to facilitate the

transmission of monetary policy actions and the flow of credit to the
economy.

• This helps in injecting liquidity in the banking system.

• Funds through LTRO are provided at the repo rate. This means that banks can
avail one year and three-year loans at the same interest rate of one day repo.

• But usually, loans with higher maturity period (here like 1 year and 3 years)
will have a higher interest rate compared to short term (repo) loans.
 QUALITATIVE TOOLS

Qualitative credit is used by the RBI for selective purposes. It is

used to control credit in certain specific sectors of the
economy.

Margin requirements: This refers to difference between the

securities offered and amount borrowed by the consumers.

Consumer Credit Regulation: This refers to issuing rules

regarding down payments and maximum maturities of
installment credit for purchase of goods.
 QUALITATIVE TOOLS

Rationing of credit: The RBI controls the Credit granted / allocated by

commercial banks to certain sectors.

Direct Action: This step is taken by the RBI against banks that
don’t fulfill conditions and requirements. They may charge
penalty, refuse to discount their papers or even cancel the
license.

Moral Suasion: psychological means and informal means of

selective credit control.
Lending Policies of RBI
BASE RATE and MCLR
Functions of RBI
Monetary Policy Committee
 Monetary Policy - Issues

LIMITED ROLE IN CONFLICT BETWEEN

CONTROLING PRICES FISCAL POLICY

EXISTENCE OF BLACK SUPPLY SIDE

MONEY CONSTRAINTS

DOMINANCE OF LARGE NON-MONETISED

DEPOSITS IN TOTAL SECTOR
FUNDS WITH BANKS
 BANKING

Banking is the business of accepting for the purpose of lending

or investment, of deposits of money from the public repayable
on demand or otherwise and withdraw-able by cheque, draft,
and order or otherwise.
Scheduled Banks and Non
Scheduled Banks
BANKING
 Regional Rural Banks

Regional Rural Banks (RRBs) were set up under the provisions

of 26 September 1975 ordinance and the RRB Act of 1976 to
allocate banking and credit services for agriculture and other
rural sectors. They were established on the recommendation of
Narshimham Working Group. That time, almost 70% of India’s
population was based on rural region.
Currently there are 43 RRBs in India and each RRB is sponsored
by Government of India along with State Government and
Sponsor bank.

RRBs were created with the following objective in mind:

• To provide banking services to rural and semi-urban areas.
• Locker, debit and credit card facilities to the rural people.
• To enhance employment opportunities by promoting trade
and commerce in rural areas.
• To support entrepreneurship in rural areas.
• Pension and MGNREGA wages distribution
Payment Banks and Small
Finance Banks
 Small Finance Banks

The guidelines permit payments banks to convert into SFBs

after five years of operations. Urban co-operative banks have
also been allowed to convert into SFBs. For this, they will
require an initial net worth of Rs 100 crore, which needs to be
hiked to Rs 200 crore within five years of conversion
 Priority Sector Lending

• Priority Sector refers to those sectors of the economy which

may not get timely and adequate credit.
• Priority Sector Lending is an important role given by the
Reserve Bank of India (RBI) to the banks for providing a
specified portion of the bank lending to few specific sectors.
• This is essentially meant for an all-round development of
the economy as opposed to focusing only on the financial
sector.
 Priority Sector Lending

Agriculture Housing

Micro, Small and

Export Credit
Medium Enterprises

Renewable Energy Education

Social Infrastructure Others

Priority Sector Lending
Priority Sector Lending
Certificates
 Non-Performing Assets

A non-performing asset (NPA) is a loan or advance for which the principal or

interest payment remained overdue for a period of 90 days.

Banks are required to classify NPAs further into Substandard, Doubtful and Loss
assets.

1. Substandard assets: Assets which has remained NPA for a period less than or
equal to 12 months.

2. Doubtful assets: An asset would be classified as doubtful if it has remained in

the substandard category for a period of 12 months.

3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little
value that its continuance as a bankable asset is not warranted, although there
may be some salvage or recovery value.”
Reason for NPA’s

The answer lies partly in the credit boom of the years 2004-05
to 2008-09.

v In that period, commercial credit (or what is called ‘non-

food credit’) doubled.

v It was a period in which the world economy as well as the

Indian economy were booming.

v Indian firms borrowed furiously in order to avail of the

growth opportunities they saw coming.

v Most of the investment went into infrastructure and related

areas — telecom, power, roads, aviation, steel.

v Businessmen believed, as many others did, that India had

entered an era of 9% growth.
Reasons for NPA’s

During late 2000s, GFC or Global Financial Crisis happened in

the west. It was a result of housing crisis. It was also called
subprime crisis. However, the effects took time to role over to
India.

However, in the late 2000s:

v Costs increased due to delays in environmental and land

clearances.

v Revenues collapsed due to global downturn.

v RBI increased interest rates due to rising inflation.

v Rupee depreciated leading to higher debt-servicing

liabilities.
Reasons for NPA’s

Other Factors:

v Supply Constraints – Lack of infrastructure e.g. Road, power

etc.

v Problems in Manufacturing sector.

v Evergreening of loans – Restructuring of loans to extend the

repayment times in hopes of project becoming viable.

v Non- Coordination in banking system.

v Governance issues in banks management.

Impact of NPA

Implications of NPAs:
v Twin Balance Sheet Syndrome – Over-leveraged
corporates and stressed banks
v Credit Growth decreases
v Corporates investment ability decreases
v Production capacity of Economy decreases
v Unemployment increases

Effects on Banks:
v Regulatory norms like CAR need to be strengthened
v Net income of banks decrease
v Provisioning (money kept aside in anticipation of an
NPA according to Basel norms) increases
v Operating earnings fall
v Shares of PSBs fall
Capital Adequacy Ratio

The capital adequacy ratio (CAR) is a measurement of a

bank's available capital expressed as a percentage of a
bank's risk-weighted credit exposures.
The capital adequacy ratio, also known as capital-to-risk
weighted assets ratio (CRAR), is used to protect
depositors and promote the stability and efficiency of
financial systems around the world.
 NPA Data

Performing Assets (NPAs) of Public Sector Banks (PSBs)

is around ₹8,95,601 crore as on March 31, 2018.

Performing Assets (NPAs) of Public Sector Banks

(PSBs) stood at ₹7.27 lakh crore as on September 30,
2019.

The share of Gross Non-Performing Assets (GNPAs) among total loans

declined to 9.1% in FY19 after having risen for seven consecutive years.
NPA Solutions

STEPS TAKEN SO FAR:

SDR – Strategic Debt Restructuring – Creditors could take over

and sell to new owners.

CDR – Corporate Debt Restructuring – Creditors came together

to restructure the debt of companies so as to provide timely
support by reducing the interest rates or by increasing the
tenure of the loan

5/25 Scheme – It allows banks to extend long-term loans of 20-

25 years to match the cash flow of projects, while refinancing
them every five or seven years
NPA Solutions

S4A – Scheme for Sustainable Structuring of Stressed

Assets – deep financial restructuring of big debt projects
by allowing lender (bank) to acquire part equity of the
stressed project and restructuring the other part

ARCs – Asset Reconstruction Companies – The idea is

Efficient division of labour, so that, banks concentrate on
the business of deposits and loans. On the other hand,
ARCs specialize in the business of NPA resolution
NPA Solutions

DRTs – Debt Recovery Tribunals – Debt Recovery

Tribunals were established to facilitate the debt recovery
involving banks and other financial institutions with their
customers. They are quasi-judicial authorities.

SARFAESI Act – Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest
Act, 2016 – Banks utilize this act as an effective tool for
bad loans (NPA) recovery where non-performing assets
are backed by Securities. Upon loan default, banks can
seize the securities (except agricultural land) without
intervention of the court.
 INDRADHANUSH PLAN

Appointments Capitalisation Empowerment

Governance

Banks Board Framework for Accountability

Destressing
Bureau

It is a comprehensive plan for recapitalisation of public sector

lenders, with a view to make sure they remain solvent and fully
comply with the global capital adequacy norms, Basel-III.

It is a 7-pronged plan to address the challenges faced by public

sector banks (PSBs). Many of the measures taken were
suggested by P J Nayak committee on Banking sector reforms
as indicated.
Indradhanush Plan

APPOINTMENTS – separation of posts of CEO and MD to check

excess concentration of power and smoothen the functioning
of banks; also induction of talent from private sector (
recommendation of P J Nayak Committee)

BANK BOARDS BUREAU – will replace the appointments board

of PSBs.
v It will advise the banks on how to raise funds and how to go
ahead with mergers and acquisitions.
v It will be a step into eventual transition of the bureau into a
bank holding company. It will separate the functioning of
the banks from the government by acting as a middle link.
v The bureau will have three ex-officio members and three
expert members, in addition to the Chairman.
Indradhanush Plan

CAPITALISATION
v Capitalization of the banks by inducing Rs 70,000 crore into
the banks in the next 4 years
v Banks are in need of capitalization due to high NPAs and due
to need to meet the new BASEL- III norms

DE-STRESSING
v Solve issues in the infrastructure sector to check the
problem of stressed assets in banks

EMPOWERMENT
v Greater autonomy for banks; more flexibility for hiring
manpower
Indradhanush Plan

FRAMEWORK OF ACCOUNTABILITY

v The banks will be assessed based on new key performance

indicators.
v These quantitative parameters such as NPA management,
return on capital, growth and diversification of business and
financial inclusion as well as qualitative parameters such as
human resource initiatives and strategic steps to improve
assets quality.

GOVERNANCE REFORMS

v GyanSangam conferences between government officials and

bankers for resolving issues in banking sector and chalking
out future policy.
Prompt Corrective Action

PCA framework is supervisory tool of RBI, which involves

monitoring of certain performance indicators of banks to check
their financial health as early warning exercise and to ensure
that banks don’t go bust.

Its objective is to facilitate banks to take corrective measures

including those prescribed by RBI, in timely manner to restore
their financial health.

It also provides opportunity to RBI to pay focused attention on

such banks by engaging with management more closely in
those areas.
Prompt Corrective Action

PCA framework is invoked on banks when they breach any of

three key regulatory trigger points (or thresholds). They are
capital to

v Risk weighted asset ratio,

v Net non-performing assets (NPA) and
v Return on Assets (RoA). - ration of total income to total
assets

Depending on risk thresholds set in PCA framework, banks are

put in two type of restrictions -
Prompt Corrective Action

v RBI can place restrictions on dividend distribution, branch

expansion, and management compensation.

v Only in an extreme situation, would a bank be a likely

candidate for resolution through amalgamation,
reconstruction or winding up.

v RBI may place restrictions on credit by PCA banks to unrated

borrowers or those with high risks, but it doesn’t invoke a
complete ban on their lending.

v RBI may also impose restrictions on the bank on borrowings

from interbank market.

v Banks may also not be allowed to enter into new lines of

business
NPA Solutions

Economic Survey has proposed 4 steps with the name of 4Rs for
resolution of NPA crisis.
4 Rs refer to Recognition, Recapitalization, Resolution, and Reform.

v Recognition – Banks must value their assets accurately as far as

possible

v Re-capitalisation – Banks’ capital position must be safeguarded via

infusions of equity

v Resolution – The underlying stressed assets in the corporate sector

must be sold or rehabilitated

v Reform – future incentives for the Private Sector and corporates must
be set-right to avoid a repetition of the problem
Insolvency and Bankruptcy
Code
Insolvency and Bankruptcy
Code
Insolvency and Bankruptcy
Code
Importance of IBC

v The bankruptcy code will make it easier for companies to

wind up

v Promote entrepreneurship, availability of credit, and

balance the interests of all stakeholders.

v It will minimize the problem of delay as there are strict

timelines within which the case has to be disposed off.

v The code will also consolidate the existing laws thus

making the process simpler.

v Quick disposal of cases will maximize the recovery

amount.
Importance of IBC

v Establishment of information utilities will help in

creating a database to provide information on the
insolvency status of individuals.

v Specialized insolvency professionals will help in

guiding through the process.

v Encourages financial institutions to extend credit

facilities thus strengthening the financial markets with
increased availability of credit for business

v Ease of doing business and issue of NPA's can be

controlled.
 Issues with IBC

AREA ISSUE
Missing the deadline Many cases are pending for more than 600 days due to
continuous litigation

Lack of benches and judges India has only 14 NCLTs. Also there are vacancies of judges in
NCLTs

Fragmented information in Code provides for the creation of multiple IUs.

multiple IUs This may lead to financial information being scattered across
these IUs

Burden for small creditors Mandating all operational creditors to submit financial
information to IUs may create a burden for small creditors

Conflict of interest in IPAs Creation of multiple IPAs could enable competition in the
sector. However, this may also lead to a conflict of interest
between the regulatory and competitive goals of the IPAs
PROJECT SASHAKT
PROJECT SASHAKT
PROJECT SASHAKT
 NBFC

v A Non-Banking Financial Company (NBFC) is

a company registered under the Companies Act,
1956 engaged in the business of loans and advances,
acquisition of
shares/stocks/bonds/debentures/securities issued
by Government or local authority or other marketable
securities of a like nature.

v NBFC does not include any institution whose principal

business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than
securities) or providing any services and
sale/purchase/construction of immovable property.
NBFC

DIFFERENCE BETWEEN BANKS & NBFCS

NBFCs lend and make investments and hence their

activities are akin to that of banks; however there
are a few differences as given below:

v NBFC cannot accept demand deposits;

v NBFCs do not form part of the payment and
settlement system and cannot issue cheques
drawn on itself;
v Deposit insurance facility of Deposit Insurance
and Credit Guarantee Corporation is not
available to depositors of NBFCs, unlike in case
of banks.
Cooperative Banks

A Co-operative bank is a financial entity which

belongs to its members, who are at the same time
the owners and the customers of their bank.

Co-operative banks in India are registered under

the States Cooperative Societies Act. The Co-
operative banks are also regulated by the Reserve
Bank of India (RBI) and governed by the

• Banking Regulations Act 1949

• Banking Laws (Co-operative Societies) Act,
1955.
Features of Cooperative Banks

Customer Owned Entities: Co-operative bank members are

both customer and owner of the bank.

Democratic Member Control: Co-operative banks are owned

and controlled by the members, who democratically elect a
board of directors. Members usually have equal voting rights,
according to the cooperative principle of “one person, one
vote”.

Profit Allocation: A significant part of the yearly profit, benefits

or surplus is usually allocated to constitute reserves and a part
of this profit can also be distributed to the co-operative
members, with legal and statutory limitations.

Financial Inclusion: They have played a significant role in the

financial inclusion of unbanked rural masses.
Structure of Cooperative Banks
Major issue with Cooperative
Banks
DUAL REGULATION OF URBAN COOPERATIVE BANK

v Urban Co-operative Banks are regulated and supervised by State

Registrars of Co-operative Societies (RCS) in case of single-
State co-operative banks and Central Registrar of Co-operative
Societies (CRCS) in case of multi-State co-operative banks and
by the RBI.

v The RCS exercises powers under the respective Co-operative

Societies Act of the States with regard to incorporation,
registration, management, amalgamation, reconstruction or
liquidation and in case of UCBs that have multi-State presence,
are exercised by the CRCS.

v The banking related functions such as issue of license to start

new banks/branches, matters relating to interest rates, loan
policies, investments and prudential exposure norms
are regulated and supervised by the Reserve Bank under the
provisions of the Banking Regulation Act, 1949.
 TAXATION

Tax is a payment collected from individuals or firms by government. Funds provided

by taxation are used by governments to carry out the functions such as

v Creation of infrastructure – roads, ports etc.

v Social infrastructure like education, health etc.

v Social welfare schemes like MGNREGA etc.

v Social security measures like pensions for the

elderly unemployment benefits

v Defence expenditure

v Enforcement of law and order

v Redistribution of wealth and decrease inequality

Types of Taxes
 Direct Tax

v It is a type of tax where the incidence and impact of

taxation fall on the same entity.
v In the case of direct tax, the burden can’t be shifted
by the taxpayer to someone else.
v These are largely taxes on income or wealth. Income
tax, corporation tax, property tax, inheritance tax and
gift tax are examples of direct tax.

MERITS v They are progressive in nature and reduce inequality

in the society.

v They are also elastic i.e. they show quick result when
DE-MERITS
increased or decreased.
 Indirect Taxes

v It is a type of tax where the incidence and impact of taxation

does not fall on the same entity.
v Indirect tax has the effect to raising the price of the products
on which they are imposed.
v Customs duty, central excise, service tax and value added
tax are examples of indirect tax.
v Their value is included in the final value of the good.
Therefore they are also called hidden taxes.

MERITS
v They also have a wider base, and everyone is covered. There
is less evasion especially under VAT/GST (invoice credit).
v Government can keep check on harmful consumption. eg
gold, tobacco etc. by taxing them higher.

DE-MERITS v They are regressive in nature

 Taxation - Terms

TAX RATE: The tax rate is the percentage of an income or an

amount of money that must be paid as tax.

LAFFER CURVE
It was developed by Arthur Laffer. The Laffer Curve is a graphic
representation of the relationship between rates of taxation
and the resulting levels of government revenue. According to it,
the tax collection
increases as the tax rate increases. The theory tries to arrive at
an optimal tax rate beyond which tax revenues for an economy
tend to fall.

TAX BASE: A tax base is defined as the total value of assets,

properties or income in a certain area or jurisdiction. For
example, taxable income is the tax base for income tax and
assessed value is the tax base for property taxes.
Taxation - Terms

PROGRESSIVE TAX: Here the tax rate increases as the

taxable amount increases. They reduce inequality in the
society. Direct taxes are progressive in nature.

REGRESSIVE TAX: The tax as a percentage of income (Tax

rate) falls as the income rises.
They increase inequality in the society. Indirect taxes are
regressive in nature.

PROPORTIONAL TAX: The tax as percentage of income is

constant over all income level.
Taxation - Terms

AD VALOREM TAX: If a tax is levied as a percentage of

the value of the good regardless of the number of units
produced/sold/imported eg.10% on the value of the car.

SPECIFIC TAX: It is a tax that is defined as a fixed amount

for each unit of a good or service sold, such as rupees
per kilogram or rupees per meter. It is thus proportional
to the quantity of a product sold, regardless of its price.
 Taxation - Terms

Negative income Tax: Subsidy is a negative income tax. It is a

taxation system where income subsidies are given to persons or
families that are below the poverty line.

Tax Buoyancy: It refers to the percentage change in tax revenue

with the growth of national income. That is, growth-based increase
in tax collections.

Tax Elasticity: Tax elasticity is defined as the percentage change in

tax revenue in response to the change in tax rate and buoyancy, on
the other hand is the response to economic growth when the base
increases but no change in the rate.

Tax Stability: It means no frequent changes and continuity of policy

in a predictable and transparent manner.
 Taxation - Terms

Tax Shelters: Any technique which allows one to legally reduce or avoid tax liabilities. It
is a way in which the taxpayer can invest his income in particular kind of investment
giving tax concessions.

Tax Planning
Tax planning refers to the reduction in net tax liability by use of various provisions
provided under tax laws. This is done by taking advantage of the various tax exemptions,
deductions, and reliefs permitted under tax laws.

Tax Avoidance
Tax avoidance refers to the reduction in net tax liability by exploiting loopholes in tax laws.
Tax avoidance involves deliberately performing an act that helps in avoiding tax while
subsequently adhering to the legal framework.

Tax Evasion
It is a practice wherein tax payment is avoided either entirely or partially by breaching
provisions of taxation laws. Tax evasion is illegal and is commonly carried out by not
reporting the income (or reporting less income) or by reporting inflated expenses.
 Taxation - Terms

Cess
A cess imposed by the central government is a tax on tax,
levied by the government for a specific purpose. Amount
collected by imposing a cess for a particular purpose can
be used for that purpose only and not for any general
purpose.

Surcharge
Surcharge is a charge on any tax, charged on the tax
already paid. It can be used for any purpose by the
central government. A common feature of both
surcharge and cess is that the centre need not share it
with states.
 Taxation - Terms

Pigovian Tax: The pigovian tax is imposed on bodies that

have a negative externality. Externality means impact of
one person’s actions upon the well being of an outsider
(bystander or third party).

Tobin Tax: James Tobin, an economist proposed a

worldwide tax on all foreign exchange transactions when
foreign capital enters a country and when it leaves. The
aim is to check speculative flows. Long term investment
– generally FDI, will not suffer as it does not invest for
speculative (short term) reasons like FIIs.
 Dividend Distribution Tax

v A dividend is a return given by a company to its shareholders out

of profits made by it during a particular year. They are usually
given in proportion to the number of shares owned.

v In India, a company which has declared, distributed or paid any

amount as dividend is required to pay a dividend distribution tax at
15%.

v The provisions of DDT were introduced by the Finance Act 1997.

Only a domestic company is liable for the tax.

v Income by way of dividend in excess of Rs 10 lakh would be

chargeable at the rate of 10%
 Capital Gains Tax

Capital gains are the rising worth of an investment that makes its current
value higher than when it was originally bought by the owner

Short-Term Capital Gains:

As per the Income Tax laws of India, if an investor holds an immovable
asset for less than 36 months before selling it, it would be considered a
short-term capital gain.
Stocks, shares and bonds are faster-moving compared to real estate.
Because of this, if they are held for 12 months or less before sale, they fall
under short-term capital gains.

Hence, the long-term capital gains arising from transfer of long-term

capital assets like such as shares or share-oriented products, exceeding
Rs. 1 lakh will be taxed at a concessional rate of 10%.
The short-term capital gains tax at 15% will continue for transfer of shares
within 1 year.
Minimum Alternative Tax
Minimum Alternative Tax
Presumptive Taxation Scheme
Tax Havens
Tax Havens
 Shell Company

Shell Company is a corporate entity without active

business operations or significant assets. They are often
created to avoid taxes and many big companies create
shell corporations to avoid taxes without attracting legal
actions.
Shell Company
Money Laundering

Money Laundering is a process of concealing the source

of money usually earned through illegal activities or is
otherwise black money. In other words, illegal money is
introduced into the financial system and made to appear
as if It is earned from a legal source
Money Laundering

Common Methods of Money Laundering

1. Structuring or smurfing is a method whereby cash

deposits are made into bank in small amounts. Small
deposits usually defeat suspicion of anti-money
laundering agencies.

2. Bulk cash smuggling refers to the transfer of a large

amount of money to foreign jurisdiction and
depositing it in a financial institution such as an
offshore bank, which follows secrecy norms.

3. Cash-intensive business refers to the fake claim that

the business of a person has earned the cash, which
is otherwise derived from a criminal source.
Money Laundering

4. Casinos and gambling: Individuals convert cash into

chips at casinos and then get chips converted into
cheque amount, which is shown as prize money won by
them in the casino.

5. Round tripping refers to the transfer of money to a

foreign jurisdiction typically a tax haven, where the
money is subjected to low tax rates and this money is
retransferred to domestic territory as foreign investment.
Such foreign investment may be directed back into the
self-owned domestic business.
 Money Laundering

The Financial Action Task Force (FATF) is an

intergovernmental body set up in 1989 to combat
money laundering. The primary functions of the FATF
are as follows:

1. Monitors member nations and their organizations’

progress in anti-money laundering measures.
2. Reviewing and reporting on laundering trends,
techniques and counter measures.
3. Promotion and adoption of anti-money laundering
measures at the global level
 Money Laundering

PREVENTION OF MONEY LAUNDERING ACT, 2002

The objective of the act is to prevent money laundering and provide for
punishment and confiscation of property derived from money
laundering. Salient features of the act are as follows:

1. The act provides punishment for indulging in money laundering or

facilitating money laundering with rigorous imprisonment from 3 to
7 years and a fine without any upper limit.
2. The property acquired through money laundering shall be
confiscated by the Government India.
3. The order of the executive agency under the act can be challenged
before an appellate tribunal and the order of appellate tribunal can
further be challenged before a High Court.
4. Burden of proof is on the accused to explain the source of acquired
money.
Money Laundering

ENFORCEMENT DIRECTORATE (DIRECTORATE GENERAL OF ECONOMIC

ENFORCEMENT)
• The Directorate General of Economic Enforcement is a law-enforcement
agency and economic intelligence agency responsible for enforcing and
fighting economic crime in India. It is a part of the Department of
Revenue, Ministry of Finance.
• It comprises officers of the Indian Revenue Service, Indian Police Service,
and the Indian Administrative Service.
• It was set up in 1956 to deal with foreign exchange violations under the
Foreign Exchange Regulation Act, 1947.
• Presently, the prime objective of the Enforcement Directorate is the
enforcement of two key acts of the Government of India: the Foreign
Exchange Management Act (FEMA) 1999 and Prevention of Money
Laundering Act (PMLA) 2002.
Double Taxation Avoidance
Agreement

The DTAA, or Double Taxation Avoidance Agreement is a tax treaty

signed between India and another country ( or any two/multiple
countries) so that taxpayers can avoid paying double taxes on their
income earned from the source country as well as the residence
country.

DTAAs are of 2 types – source model and destination model

SOURCE MODEL – tax paid in country where income takes place eg:
Audi India paying 10cr tax to India. Tax paid to the country where
profit/income is taking place.

DESTINATION MODEL- Audi Netherlands paying tax to Netherlands

govt on profit made in India. Tax paid to the country where actual
profit is going (destination).

In DTAA, developing countries want source type DTAA, while

developed countries want destination type DTAA.
 Withholding Norms

Capital Gains Tax(CGT) & Withholding norms (TDS)

Assume a seller wants to sell a company to a buyer at profit of 1000 crore

and has to pay 100 crore CGT to income tax department. In real life, seller
himself doesn’t need to pay 100 Crore CGT to Government.
Buyer will keep aside 100 crore for government and pay only 1000 – 100 =
900 crores to seller. This is called withholding norms or Tax deduction at
source (TDS). So withholding tax is a tax deducted at source, especially
one levied by some countries on interest or dividends paid to a person
resident outside that country.
Vodafone CGT case

IT Act 1961: Clarification (2012)

• Capital gains will be levied on companies
outside India, whose value is derived from
Indian Asset

• Such companies will be considered located

within India

• Will apply to all deals from 1962 onwards

(hence called “Retrospective”)
Transfer Pricing

Transfer pricing is the price paid by a firm for a good

or service while purchasing it from a related entity.

The operation of MNCs indicates that there are

greater volume of transactions within a firm. Firms
may be purchasing components and other semi
finished products from their affiliates. Some
estimates say that nearly 60 per cent of international
transactions are intra-firm transactions.

Transfer mispricing, or transfer pricing manipulation

refers to trade between related parties at prices meant
to manipulate markets or to cheat tax authorities.
Often, avoidance of taxes is the main purpose of
transfer mispricing.
Arm’s Length Pricing
Advance Pricing Agreement
 Advance Tax Ruling

• Suppose a foreign company enters India via Joint Venture /

Subsidiary / etc.
• But India has a complex tax structure; the foreign company may
need clarification in advance, on the Taxes that may apply to it.

• To help foreign companies, Government setup a body called

Authority for Advance Ruling (AAR).
• Foreign company can file application to AAR, to seek clarification
on its tax liabilities & AAR has to reply within 6 months.
• AAR is binding on both company (Tax payer) and IT department. IT
officials cannot send notices/raids if AAR already rules in advance
that a particular matter is exempted.
• Even Indian companies can approach AAR.

• Thus, AAR provides clarity on tax structure in India, Promotes

“Ease of Doing business”, Speedy decisions & Avoids lengthy court
litigations.
Base Erosion and Profit
Shifting
GST
GST
GST
GST
GST
GST
GST
GST Composition Scheme
 GST Composition Scheme

A taxpayer whose turnover is below Rs 1.5 crore* can opt for

Composition Scheme. In case of North-Eastern states and
Himachal Pradesh, the limit is now Rs 75* lakh.

The following conditions must be satisfied in order to opt

The following people cannot opt for the scheme-
for composition scheme:
• Manufacturer of ice cream, pan masala, or
• No Input Tax Credit can be claimed by a dealer opting
tobacco
for composition scheme
• A person making inter-state supplies
• The dealer cannot supply goods not taxable under GST
• A casual taxable person or a non-resident
such as alcohol.
taxable person
• If a taxable person has different segments of businesses
• Businesses which supply goods through an e-
(such as textile, electronic accessories, groceries, etc.)
commerce operator
under the same PAN, they must register all such
businesses under the scheme collectively or opt out of
the scheme.
• The taxpayer has to mention the words ‘composition
taxable person’ on every bill of supply issued by him.
Reverse Charge Mechanism
GST e-Way Bill
GST
GST Issues
 External Sector

The balance of payments (BOP) is a statement of all

transactions made between entities in one country and
the rest of the world over a defined period of time, such
as a quarter or a year.
Balance of Payment
Balance of Trade
Balance of Invisibles
Capital Account
Foreign Exchange Reserve
Foreign Exchange Reserve
Exchange Rate System

Fixed Exchange Rate

Floating Exchange Rate

Managed Floating Rate

Exchange Rate
Exchange Rate
 Nominal Effective Exchange
Rate

• The nominal effective exchange rate (NEER) is a form of

measuring a currency’s nominal exchange rate relative to a
basket of other currencies using a weighted-average
calculation.
• NEER is also sometimes referred to as the “trade-weighted
currency index.
 Real Effective Exchange Rate

• Real effective exchange rate is defined as “a weighted average of nominal

exchange rates adjusted for relative price differential between the domestic and
foreign countries, relates to the purchasing power parity (PPP) hypothesis".

• As the definition highlights, REER takes price differential and inflation into account
and, therefore, is said to be a better indicator of the competitiveness of the
country in terms of exchange rates.

• In India, Reserve Bank of India (RBI) complies with REER indices. The first one is
based on six country’s trade-based weights and the second on 36-currencies’
export and trade-based weights.

• The indices are also a better reflection of the position of a currency in comparison
with the countries in which India has large export and trade interest. The base is
taken as 100 and currently the base year is 2004-2005

• A rise in the level of index indicates appreciation of currency and vice-versa.

Foreign Institutional
Investments
Foreign Direct Investment
 Foreign Direct Investments

Sectors which attracted maximum foreign inflows during 2019-20

include
• services ($ 7.85 billion),
• computer software and hardware ($ 7.67 billion),
telecommunications ($ 4.44 billion),
• trading ($ 4.57 billion),
• automobile ($ 2.82 billion),
• construction ($ 2 billion), and
• chemicals ($ one billion).

Singapore emerged as the largest source of FDI in India during the

last fiscal with $ 14.67 billion investments.
Mauritius ($ 8.24 billion), the Netherlands ($ 6.5 billion), the US ($
4.22 billion), Caymen Islands ($ 3.7 billion), Japan ($ 3.22 billion),
and France ($ 1.89 billion).
Foreign Direct Investments
Financial Market

Financial markets play a vital role in facilitating the

smooth operation of capitalist economies by allocating
resources and creating liquidity for businesses and
entrepreneurs.
The markets make it easy for buyers and sellers to trade
their financial holdings.
Financial markets create securities products that provide
a return for those who have excess funds
(Investors/lenders) and make these funds available to
those who need additional money (borrowers).
Financial Market

The money market involves the purchase

and sale of large volumes of very short-
term debt products, such as overnight
reserves or commercial paper.
Financial Market

In India, the Central Government issues both, treasury

bills and bonds or dated securities while the State
Governments issue only bonds or dated securities, which
are called the State Development Loans (SDLs). ...
Treasury bills are zero coupon securities and pay no
interest
Financial Market
Financial Market
Financial Market

A corporate would be eligible to issue CP

provided the tangible net worth of the
company, as per the latest audited balance
sheet, is not less than Rs. 4 crore.

It requires credit rating from a credit rating

agency

CP can be issued for maturities between a

minimum of 7 days and a maximum of up
to one year from the date of issue.
Financial Market

Scheduled commercial banks (excluding

RRBs), co-operative banks and Primary
Dealers (PDs), are permitted to participate
in call/notice money market both as
borrowers and lenders.

As per the new regulations, Payment Banks

are also allowed to participate in CMM as
both lenders and borrowers.
 Financial Market

• Loans are availed through auction/negotiation. The auction is made on interest

rate.
• Highest bidder (who is ready to give higher interest rate) can avail the loan.
• Average interest rate in the call market is called call rate.
• Dealing in call money is done through the electronic trading platform called
Negotiated Trading System (NDS).
• The CMM is known as the most sensitive segment of the financial system.
• Since the participants are banks, the call money rate tells about the overall liquidity
position in the economy.
• Higher call rate indicates liquidity stress in the economy. In this case, the RBI may
follow up with liquidity support measures by through its monetary policy
instruments – cutting CRR or allowing more repos.
• Hence, the call money rate is taken as the operating target of monetary policy.
 Financial Market

Maturity Period: A Certificate of Deposit issued by

the commercial banks can have a maturity period
ranging from 7 days to 1 year. For financial
institutions, it ranges from 1 year to 3 years

Minimum investment amount– A CD can be issued

to a single issuer for a minimum of Rs.1 Lakh and its
multiples

Discount offered– Certificate of deposit is issued at a

discounted rate on the face value. Moreover, banks
and financial institutions can also issue CDs on a
floating rate basis
As per RBI, banks are bound to maintain the
statutory liquidity ratio (SLR) and cash reserve Co-operative banks and regional rural banks cannot
ratio (CRR) on the price of a certificate of deposit issue these certificates.
Financial Market
Financial Market

A capital market is a financial market in which

long-term debt (over a year) or equity-backed
securities are bought and sold.

Capital markets channel the wealth of savers to

those who can put it to long-term productive
use, such as companies or governments making
long-term investments
Financial Market
Financial Market
 Financial Market

As bond prices increase, bond yields fall. For example, assume an investor
purchases a bond with a 10% annual coupon rate and a par value of Rs.
1,000.

Each year, the bond pays 10%, or Rs. 100, in interest. Its annual yield is the
interest divided by its par value. As Rs. 100 divided by Rs. 1,000 is 10%, the
bond's nominal yield is 10%, the same as its coupon rate. Eventually, the
investor decides to sell the bond for Rs. 900.

The new owner of the bond receives interest based on the face value of the
bond, so he continues to receive Rs. 100 per year until the bond matures.
However, because he only paid Rs. 900 for the bond, his rate of return is Rs.
100/ Rs. 900 or 11.1%.

If he sells the bond for a lower price, its yield increases again. If he sells for a
higher price, its yield falls.
Financial Market
Financial Market
Financial Market