eco by vivek singh.docx

ECONOMICS -- VIVEK SINGH ======================== Fundamentals of Macro Economy......................................................................... 1 -------------------------------------------------------------------------------------------------------- 1. Introduction.........................

ECONOMICS -- VIVEK SINGH ======================== Fundamentals of Macro Economy......................................................................... 1 -------------------------------------------------------------------------------------------------------- 1. Introduction..................................................................................................... 1 2. 3. 1 4. 1.3 Economic Systems......................................................................................... 2 5. Four Sectors of Economy............................................................................. 3 6. 1.5 Private Sector.................................................................................................. 4 7. 6 8. 1.7 Investment....................................................................................................... 7 9. 9 10. 1.9 Gross Domestic Product.............................................................................. 12 11. GDP Calculation Methodology by NSO..................................................... 15 12. 1.11 Macroeconomic Variables........................................................................... 16 13. Nominal and Real GDP................................................................................ 17 14. 1.13 Productivity, Capital Output Ratio and ICOR........................................ 20 15. 22 16. 1.15 Nominal, PPP and Real Exchange Rates.................................................. 23 17. GDP, Welfare, Development and Human Capital................................... 27 18. 1.17 World Bank & IMF Classification of Countries...................................... 29 1.18 Inflation Indices. The basic reason behind this ---------------------------- Difference in the standard of living of these countries is that the government and the people In these developed/rich countries have efficiently exploited the limited resources of Land, labour and capital for the betterment and development of its people. Microeconomics studies individual economic agents' decisions regarding resource allocation and prices of goods and services. Macroeconomics examines the national economy as a whole, focusing on aggregate variables like GDP, unemployment, and inflation. Gross Domestic Product (GDP) is a key macroeconomic variable indicating a nation's economic performance. Central banks play a crucial role in managing interest rates and money supply. Important Dates and Events: --------------------------- Adam Smith's "The Wealth of Nations" (1776): Foundation of modern economics. Great Depression (1929-1939): Major economic downturn that influenced macroeconomic policies. Bretton Woods Conference (1944): Established the International Monetary Fund (IMF) and the World Bank. Introduction of Gross Domestic Product (GDP) as a measure (1937): Simon Kuznets. Stagflation in the 1970s: Period of high inflation and unemployment, challenging previous economic theories. \#\#\# Fundamental Economic Problems Every society must resolve three key economic questions: 1\. \*\*What to produce?\*\* \- Deciding the types and quantities of goods and services to produce. 2\. \*\*How to produce?\*\* \- Determining the methods and resources used in production. 3\. \*\*For whom to produce?\*\* \- Deciding the distribution of goods and services among the population. \#\#\# Economic Systems Economies can be organized in different ways: 1\. \*\*Market Economy\*\* \- Decisions are made by individuals and private firms. \- Prices, markets, profits, and incentives guide production and consumption. \- Laissez-faire is an extreme form where the government does not interfere. 2\. \*\*Command Economy\*\* \- The government makes all major economic decisions. \- It owns resources, directs enterprises, and controls distribution. \- Examples include the Soviet Union in the 20^th^ century. 3\. \*\*Mixed Economy\*\* \- Most modern economies are mixed, combining elements of both market and command systems. \- Governments regulate economic activities, produce certain goods, and provide services. \#\#\# Sectors of the Economy A mixed economy is divided into four sectors: 1\. \*\*Private Sector\*\* \- Includes enterprises owned by private individuals or groups. \- Example: Reliance Industries Ltd. (RIL). The private sector is made up of businesses owned by private individuals. These businesses need four key inputs to produce goods and services: entrepreneurs (who take risks for profit), capital (machinery and buildings that earn interest), natural resources (land and raw materials that earn rent), and labor (human work that earns wages). 2\. \*\*Government Sector\*\* \- Encompasses public administration, defense, and public enterprises. \- Example: Coal India Ltd. (CIL). 3\. \*\*Household Sector\*\* \- Consists of individuals who work in various sectors and earn incomes. \- Example: An employee of CIL belongs to the household sector. 4\. \*\*External Sector\*\* \- Includes international trade and financial flows. \- Comprises exports, imports, and cross-border financial transactions. TYPES OF GOODS -------------- Goods can be categorized into intermediate goods and final goods. Final goods are further divided into consumption goods and capital goods. ------------------------------------------------------------------------------------------------------------------------------------------- Intermediate Goods: Need further processing (e.g., steel sheets). Final Goods: Ready for use, either for consumption or production. **Consumption Goods:** - Goods consumed by the end user. - **Types:** 1. **Durable Consumption Goods:** - Last for more than 3 years. - **Example:** Home appliances, electronics, furniture. - **One-Liner:** Durable goods last more than 3 years. 2. **Non-Durable Consumption Goods:** - Used up quickly, usually within 3 years. - **Example:** Food, clothing, paper. - **One-Liner:** Non-durable goods are used up quickly. 3. **Services:** - Intangible and consumed immediately. - **Example:** Education, healthcare, banking. - **One-Liner:** Services are intangible and used immediately. Capital Goods: Used to produce other goods and services. Characteristics: Produced durable output. Acts as input for further production. Does not get consumed in the production process. Example: Tractor used in farming. One-Liner: Capital goods help in producing other goods and services. Three Important Things About Capital Goods: Made by People: Capital goods are things that people make in factories. For example, a tractor is made in a factory. Help Make Other Things: Capital goods are used to make other products. A tractor helps farmers grow crops like wheat and rice. Do Not Get Used Up: When we use capital goods, they don't get used up right away. They last a long time. For example, the tractor keeps working for many years, even though it might get a little worn out. Types of Capital: Physical Capital: These are the tools and machines, like tractors, that we can touch and use to make other things. Financial Capital: This is money that we use to buy the tools and machines. Intellectual Capital: These are ideas and inventions that people think up, like patents and copyrights. Physical capital as the capital but in Today's world intangible capital is increasingly becoming important. So, capital can be Divided into three categories. i. Physical Capital (capital goods) ii. Financial Capital (money) iii. Intellectual Capital (patents, copyrights etc.) Consumption vs. Capital Goods: Example: A washing machine at home is a consumption good, but in a laundry business, it's a capital good. Intermediate vs. Final Goods: Example: Tea leaves bought for home use are final goods, but bought by a tea seller to make tea are intermediate goods. One-Liner: The last transaction in the market determines if a good is intermediate or final. Investment in an Economy: Simple Explanation: Investment is the part of the final output (GDP) that consists of physical capital goods, not just money put into business Gross Investment: Simple Explanation: Gross investment is the total value of capital goods produced in an economy. **Gross Investment** is all the new toy-making machines you got this year. **Example:** If you got 3 new toy-making machines, that's your gross investment. One-Liner: Gross investment is the total value of new capital goods produced. Depreciation: Simple Explanation: Depreciation is the wear and tear or consumption of physical capital over time. Depreciation is when your toy-making machines get a little worn out from playing with them. Example: If one of your machines got a bit old and needs fixing, that's depreciation. One-Liner: Depreciation is the loss of value due to wear and tear of capital goods. Net Investment: Simple Explanation: Net investment is gross investment minus depreciation. Net Investment is the number of new machines you got after you fix the worn-out ones. Example: If you got 3 new machines but one got a bit old, your net investment is 2 new machines (3 new -- 1 old). Gross Capital Formation: Simple Explanation: Gross capital formation includes all investments in capital goods, valuable metals, and changes in stock/inventory. Gross Capital Formation is all the new toy-making machines, shiny new parts, and any cool new ideas you use to make toys. Example: If you got new machines, new shiny parts, and some great new toy designs, that's gross capital formation. The circular flow of income shows how money and goods move in an economy. Without savings, the economy just keeps making the same amount of goods. With savings, businesses make machines, leading to more goods in the future. GDP can be measured in three ways: expenditure, income, and product methods. GDP is the total value of everything made in a country in one year. You can measure GDP by adding up all the spending (expenditure method), all the earnings (income method), or the value of everything made (product method). **Gross Domestic Product (GDP):** The total value of all finished goods and services produced in a country during a specific time period. Methods to Calculate GDP Product or Value-Added Method Simple Explanation: Imagine a toy maker and a toy seller. The toy maker makes toys and the seller sells them. We count how much value each person adds. Example for Kids: Toy Maker: Makes toys worth \$50. Toy Seller: Buys toys for \$50, adds some decorations, and sells them for \$100. Value Added: Toy Maker's contribution = \$50. Toy Seller's contribution = \$100 (selling price) - \$50 (cost of toys) = \$50. Total GDP: \$50 + \$50 = \$100. Expenditure Method Simple Explanation: This is like adding up all the money people spend on buying toys, clothes, and other things. Example for Kids: Households: Spend \$200 on toys and food. Businesses: Spend \$50 on new machines. Government: Spends \$100 on parks and schools. Exports: We sell toys to other countries for \$30. Imports: We buy toys from other countries for \$20. Formula: GDP = Spending by households + Spending by businesses + Spending by government + Exports -- Imports Total GDP: \$200 + \$50 + \$100 + \$30 - \$20 = \$360 The above formula of GDP can also be written as: GDP = Private consumption © + Private investment (I) + Government Investment and Consumption (G) + exports (X) -- imports (M) GDP = \[Private consumption + Government consumption\] + \[Private investment + Government investment\] + Exports -- Imports =Total consumption + Total Investment + Exports -- Imports Income Method Simple Explanation: This is like adding up all the money people get from working, renting their stuff, and profits from selling things. GDP = Profit + Interest + Rent + Wages Example for Kids: Wages: \$120 (money earned by working). Rent: \$30 (money earned by renting a toy). Interest: \$10 (money earned from lending). Profit: \$40 (extra money from selling toys). Total GDP: \$120 + \$30 + \$10 + \$40 = \$200 Domestic Territory: The area where a country's economic activities take place, including its land, waters, and anything operated by its residents (like ships and planes) anywhere in the world. Value addition by the farmer is Rs. 100. Value addition does not depend on whether the Farmer is selling the wheat in the market or consuming himself. Value addition is Basically "the value/price that somebody's work will fetch in the market" and it includes Profit also. GDP of India = All States Gross Domestic Product (SGDP) + Output from Centre specific Activities like Railways, Defence, Central Highways etc. + Embassies located in other countries+ Fishing vessels, oil and natural gas rigs, floating platforms etc. operated by the residents of the Country in the international waters. Gross Fixed Capital Formation: Investment in physical assets like buildings and machinery. Example: If a company builds a new factory, buys new machinery, and upgrades its existing equipment, all these expenses contribute to Gross Fixed Capital Formation. National Statistical Office (NSO) The National Statistical Office (NSO) is the government body responsible for collecting and analyzing data on the country's economy and society. GDP Calculation Methodology by NSO Value Added Method: What It Is: This method adds up the value added by each part of the economy. Think of it like counting the extra value each step of making a product adds. Components: Agriculture, Forestry, and Fishing: Value added by farming, logging, and fishing. Mining and Quarrying: Value added by extracting minerals and stones. Manufacturing: Value added by making products in factories. Utility Services: Value added by providing electricity, water, and gas. Construction: Value added by building houses, roads, etc. Trade, Hotels, and Transport: Value added by selling goods, running hotels, and transporting people. Financial Services: Value added by banks, insurance companies, and real estate businesses. Public Services: Value added by government services like defense and public administration. Expenditure Method: What It Is: This method adds up all the spending in the economy. Components: Private Consumption Expenditure: Spending by households on goods and services. Government Consumption Expenditure: Spending by the government on public services. Gross Fixed Capital Formation (Investment): Spending on new buildings, machinery, and infrastructure. Net Exports (Exports -- Imports): Difference between what the country sells to other countries and what it buys from them. Discrepancies in Measurement: Why Discrepancies Happen: Sometimes, the two methods might show slightly different GDP numbers because it\'s hard to get perfe't data on all spending, especially private consumption. The difference is often noted as "discrepancies." Macroeconomic Variables and Concepts Explained 1. Gross National Product (GNP) Definition: GNP measures the total income earned by residents of a country, regardless of where they are located. This includes income earned by citizens abroad and excludes income earned by foreigners within the country. Example: If an Indian worker earns money from a job in the U.S., that income is included in India's GNP. But if a foreign worker earns money in India, that income is not part of India's GNP. Formula: GNP = GDP \+ Net Factor Income from Abroad (NFIA) GNP=GDP+Net Factor Income from Abroad (NFIA) Explanation: To find GNP, add income earned by residents abroad to GDP and subtract income earned by foreigners in the country. 2. Net Domestic Product (NDP) Definition: NDP adjusts GDP by subtracting depreciation, which accounts for the loss of value of capital goods over time. Formula: NDP = GDP − Depreciation NDP=GDP−Depreciation Example: If GDP is Rs. 5000 and depreciation is Rs. 500, NDP will be Rs. 4500. Depreciation reflects the wear and tear on machinery and buildings. 3. Net National Product (NNP) Definition: NNP adjusts GNP by subtracting depreciation. It represents the value of final goods and services produced by residents of a country, minus the loss of capital value. Formula: NNP = GNP − Depreciation NNP=GNP−Depreciation Example: If GNP is Rs. 6000 and depreciation is Rs. 600, NNP will be Rs. 5400. 4. Factor Cost vs. Market Price Factor Cost: The cost of production of goods and services before adding taxes and subtracting subsidies. Example: The cost of making a burger (ingredients, wages) is Rs. 100. Market Price: The price at which the goods are sold in the market, including indirect taxes and minus subsidies. Example: If a burger is sold for Rs. 100 and there is an indirect tax of Rs. 10, the market price will be Rs. 110. If there was a subsidy of Rs. 10, the market price would be Rs. 90. Formula: Market Price = Factor Cost \+ ( Indirect Taxes − Subsidies ) Market Price=Factor Cost+(Indirect Taxes−Subsidies) 5. Per Capita GDP Definition: Per capita GDP measures the average economic output per person. It helps assess the standard of living in a country. Formula: Per Capita GDP = GDP Population Per Capita GDP= Population GDP ​ Example: If GDP is Rs. 1,000,000 and the population is 1000, then per capita GDP is Rs. 1000. If the GDP grows by 8% and population by 1%, per capita GDP grows by approximately 6.9%. Important Dates and Events January 2015: India switched from calculating GDP at Factor Cost to Market Prices. Important Quoting GNP and GDP: "Gross National Product (GNP) is also called Gross National Income; and Net National Product (NNP) is also called Net National Income or just National Income." To calculate Real GDP, we take the price of any year as constant and declare it as a ***[base Year. ]*** Since January 2015, National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) has changed the base year for calculation of GDP to 2011-12. So, if we want to calculate India's Real GDP for 2014-15, we will have to take the Quantities produced in 2014-15 and the prices of 2011-12 (base year). And if we want to Calculate the Nominal GDP of 2014-15 then we will have to take the quantities produced in 2014-15 and the market prices of the same year i.e., 2014-15. To calculate GDP at market prices, first we calculate GDP at factor cost/basic prices and Then we separately add the governments total indirect taxes including both GST and non-GST tax revenue of Central and State governments. GVA basic prices = GVA factor cost Nominal vs Real GDP: Nominal GDP: Measures total economic output using current market prices. It includes changes in both quantity and price. Real GDP: Measures total economic output using constant prices from a base year. It only shows changes in quantity. Nominal GDP for each year is calculated using that year's prices and quantities. Real GDP for each year is calculated using the base year's (2011-12) prices and that year's quantities. The increase in Real GDP shows economic growth, but the rate of change is slowing down. Factor Cost vs Market Prices: GDP at Market Prices: Includes the total value of goods and services plus indirect taxes minus subsidies. GDP at Factor Cost: The basic value without considering indirect taxes and subsidies. GVA (Gross Value Added): GVA at Basic Prices: Total value added in production without considering taxes/subsidies. GVA at Factor Cost: Same as above but often used interchangeably when production taxes/subsidies are negligible. India's GDP (2022-23): Nominal GDP: Rs. 272 lakh crores. Real GDP (2011-12 prices): Rs. 160 lakh crores with a 7% growth rate from the previous year. Important Dates and Events: January 2015: NSO changed the base year for GDP calculation to 2011-12. Real GDP is steadily increasing, but the rate of change is decreasing." "In India, economic growth is measured by real GDP, i.e., GDP at constant market prices." Productivity Concepts: Average Productivity: Measures the average output produced per unit of input (like land or labor). Example: If 1 acre of land produces 2 tonnes of food, then: Productivity of Land = 2 tonnes/acre. If 5 laborers produce 2 tonnes of food, then: Productivity of Labour = 2 tonnes/5 laborers = 0.4 tonnes/laborer. Marginal Productivity: Measures the additional output produced by using one more unit of input. Example: If adding one more laborer increases production by 0.2 tonnes, then: Marginal Productivity of Labour = 0.2 tonnes/laborer. Capital Productivity: Measures the output produced per unit of capital used. Higher productivity of capital is good for the economy. Capital Output Ratio: The inverse of capital productivity. Capital/Output Ratio = Capital used / Output produced. Example: If Rs. 3 units of capital produce Rs. 1 unit of output, then the ratio is 3/1. Lower ratios are better (3/1 is better than 4/1) as they indicate higher efficiency. Incremental Capital Output Ratio (ICOR): Measures how much additional capital is needed to produce one additional unit of output. ICOR = Change in capital / Change in output. If ICOR = 5, then Rs. 5 of additional capital is needed to produce Rs. 1 of additional output. Example: If India wants to grow its GDP by 8% and ICOR is 5, then 40% investment in GDP is required. If ICOR is reduced to 4, then only 32% investment is needed for the same growth. Important Summary: Average Productivity: Output per unit of input (land/labor). Marginal Productivity: Additional output from one more unit of input. Capital/Output Ratio: Capital required per unit of output; lower is better. ICOR: Additional capital needed for one additional unit of output; lower ICOR indicates better efficiency. What happens if ICOR is reduced? Less capital is needed for the same output. We measured capital/output ratio because we are not interested in measuring the Productivity of capital rather, we want to know that in India how much (average) capital is Required to produce one unit (Rupee one) of output/GDP. Our target variable is "output/GDP" and we are always interested in knowing that if we Have to produce one unit of output then how much capital will be required. ICOR represents how efficiently the new/additional capital is being used in a country to Produce output. If ICOR of India = 5, that means India requires Rs. 5 value of extra capital goods to produce Rs. 1 of additional output. Potential GDP: It is the highest value of goods and services that can be produced when all resources (like labor, capital, land) are fully used. Think of it as the maximum possible output the economy can sustain without causing problems like high inflation. Determinants of Potential GDP: Inputs: Amount of capital (machines, buildings), land, labor, etc. Technological Efficiency: How effectively these inputs are used. Growth of Potential GDP: It grows slowly because factors like labor, capital, and technology do not change quickly. Influenced by governance, infrastructure, health and education, and how well capital is used. Actual GDP vs. Potential GDP: Actual GDP: The real output of goods and services in an economy. Potential GDP: The maximum sustainable output. Business Cycle: The economy goes through cycles of growth (upturn) and decline (downturn). During Upturn: Actual GDP can exceed Potential GDP. During Downturn: Actual GDP falls below Potential GDP. Recession and Depression: Recession: At least two consecutive quarters of negative growth in real GDP, marked by significant declines in output, income, and employment. Duration: Usually 6 to 18 months. Depression: A severe and long-lasting recession. Economic Slowdown: When the GDP growth rate is declining but still positive. Important Summary: Potential GDP: Maximum sustainable output with full employment. Determinants: Capital, labor, land, technology. Growth: Slow, influenced by various factors like governance and infrastructure. Business Cycle: Upturns and downturns affect the gap between Actual GDP and Potential GDP. Recession: Two consecutive quarters of negative GDP growth. Depression: Severe, prolonged recession. Economic Slowdown: Declining GDP growth rate but still positive. Potential GDP tends to grow slowly because inputs like labour and capital and the level of Technology changes quite slowly over time. Economic Slowdown: When the rate of economic growth decreases but remains above zero. 1. **Nominal Exchange Rate (NER)**: - The Nominal Exchange Rate is the price of one currency in terms of another currency. - For example, if \$1 equals ₹70, it means you need ₹70 to buy \$1. This can be written as \$1 = ₹70 or ₹70/\$ or \$0.014/₹. The standard format is \$0.014 per ₹. - The NER fluctuates based on the supply and demand for currencies. - The NER depends on the market forces of demand and supply. If more and more people are Purchasing dollars in the exchange market, then the demand of dollar increases and dollar Will become stronger or appreciate. But if more and more tourists are coming to India and Are converting their dollars and demanding rupees then rupee will appreciate. 2. **Purchasing Power Parity (PPP) Exchange Rate**: - The PPP Exchange Rate compares the price of a basket of goods between two countries to determine the equivalent exchange rate. - If a burger costs \$1 in the US and ₹35 in India, the PPP exchange rate is \$1 = ₹35, meaning ₹35 in India has the same purchasing power as \$1 in the US. - PPP exchange rate formula: PPP Exchange Rate=Abroad PriceDomestic Price\\text{PPP Exchange Rate} = \\frac{\\text{Abroad Price}}{\\text{Domestic Price}}PPP Exchange Rate=Domestic PriceAbroad Price​. - If the inflation rate is different in both the countries then PPP exchange rate will change With time. But if both countries have same rate of inflation or zero inflation then PPP Exchange rates will remain constant. When Nominal Exchange Rate becomes equal to PPP exchange rate, we say that the Currencies of the two countries are at purchasing power parity. 3. **Real Exchange Rate (RER)**: - The Real Exchange Rate adjusts the nominal exchange rate for differences in price levels between countries. - It indicates trade competitiveness: if Indian burgers are cheaper than US burgers at the current NER, Indian exports will be more competitive. - Formula: RER=NERPPP\\text{RER} = \\frac{\\text{NER}}{\\text{PPP}}RER=PPPNER​. Trade Competitiveness and Exchange Rates: Trade Competitiveness Example: If the trade competitiveness of the US with respect to India is ½ (0.5), it means that US products are less competitive compared to Indian products. This implies that with any amount of money, you can buy twice as many items from India as you can from the US. Changes in Competitiveness: If the value of ½ (0.5) increases to 1, it means US trade competitiveness is improving and reaching parity with India. Both countries' products will be equally competitive, and trade may balance. If the value increases to 2, it means US products have become twice as competitive as Indian products. With the same amount of money, you can now buy twice as many items from the US compared to India. Currency Appreciation and Competitiveness: When a currency appreciates (increases in value), it becomes more expensive to buy goods from that country. This makes that country's trade less competitive. For example, if the nominal exchange rate (NER) changes from \$0.014 per rupee to \$0.028 per rupee, the rupee is appreciating. This makes Indian goods more expensive for foreign buyers, reducing India's trade competitiveness. Real Exchange Rate (RER): The RER shows trade competitiveness by comparing the NER to the PPP exchange rate. If the RER increases, it means the currency is appreciating, making exports less competitive. Indices and Competitiveness: If we create an index where the value ½ (0.5) equals 100, an increase in this value means the index increases, indicating the currency is appreciating and trade competitiveness is decreasing. Conversely, a decrease in this value means the index decreases, indicating the currency is depreciating and trade competitiveness is increasing. Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER): REER: A weighted average of the real exchange rates of a country's trading partners, reflecting export competitiveness. NEER: A weighted average of the nominal exchange rates with respect to a group of other countries. Purchasing Power Parity (PPP): When the Real Exchange Rate (RER) equals 1, it means the NER equals the PPP exchange rate, and the currencies are at purchasing power parity. Goods cost the same in both countries when measured in the same currency. Important Summary: Competitiveness: How competitive a country's goods are in the global market. Appreciation: Currency value increases, making exports more expensive and less competitive. Depreciation: Currency value decreases, making exports cheaper and more competitive. REER: Measures export competitiveness with multiple trading partners. NEER: Measures nominal exchange rates with multiple countries. Important Dates and Events: Dec 2017 -- Oct 2018: Period of rupee depreciation, increasing India's trade competitiveness. Oct 2018 -- Jan 2019: Period of rupee appreciation, decreasing India's trade competitiveness. Important Quoting: "When Real Exchange Rate = 1, Nominal Exchange Rate = PPP Exchange rate, and we say that the currencies are at purchasing power parity **What is GDP?** - GDP stands for Gross Domestic Product. It measures the total value of all goods and services produced in a country in a year. It\'s like counting all the toys and cookies made in a year. **2. What GDP Does and Doesn\'t Measure:** - GDP tells us how much stuff a country makes but doesn\'t tell us how happy people are or if everyone has enough cookies. A country can have a high GDP but still have problems like pollution or inequality. **3. Why GDP Isn\'t Everything:** - GDP is a number that shows economic activity. Criticizing GDP for not showing happiness or fairness is like blaming a thermometer for not telling you if you have enough cookies. **4. Other Measures for Wellbeing:** - For a full picture of wellbeing, we need other measures besides GDP, like those that show how wealth is distributed, how clean the air is, or how happy people are. **5. Economic Development:** - Economic development is more than just GDP growth. It includes improving people\'s lives by providing better education, healthcare, and infrastructure. **6. Human Capital:** - Human capital refers to people\'s skills and knowledge. Investing in education and health can turn students into doctors and engineers, making a country more productive. **7. Green GDP:** - Green GDP includes environmental costs. For example, cutting down trees for a factory increases GDP but also harms the environment. Green GDP considers both. **8. Carbon Tax:** - Carbon taxes are charges on pollution. They make polluting activities more expensive to encourage cleaner practices. ### Important Summary: - **GDP**: Measures economic activity, not happiness or equality. - **Economic Development**: Includes GDP growth and improvements in quality of life. - **Human Capital**: Investing in education and health increases productivity. - **Green GDP**: Considers environmental costs of economic activities. - **Carbon Tax**: Discourages pollution and promotes cleaner energy. 2010: Introduction of the Clean Energy Cess in India. 2017: Introduction of the GST Compensation Cess in India, replacing the Clean Energy Cess. GDP measures the total market value of all final goods and services but not the welfare or happiness of people." ### World Bank Classification 1. **High Income:** Countries where each person makes more than \$13,205 per year. - Example: Imagine you get more than 13,205 candies in a year. 2. **Upper Middle Income:** Countries where each person makes between \$4,255 and \$13,205 per year. - Example: You get between 4,255 and 13,205 candies in a year. 3. **Lower Middle Income:** Countries where each person makes between \$1,085 and \$4,255 per year. - Example: You get between 1,085 and 4,255 candies in a year. - **India\'s Position:** India is in this group with each person making about \$2,500 per year. 4. **Low Income:** Countries where each person makes less than \$1,085 per year. - Example: You get less than 1,085 candies in a year. ### Important Points: - **GNI per capita:** How much money each person in the country makes on average in a year. - **PPP Exchange Rate:** A way to compare different countries\' currencies through a \"basket of goods\" approach. - **India\'s GNI per capita:** Around \$9,000 using PPP (a different way to measure money that considers what you can buy with it in different countries). ### IMF Classification The International Monetary Fund (IMF) classifies countries into two main groups: 1. **Advanced Economies:** - These are like the top students in the class who score the highest marks. 2. **Emerging Market and Developing Economies:** - These are like students who are still improving their scores but aren\'t at the top yet. ### Parameters for IMF Classification: 1. **Per Capita Income (PPP):** - How much each person can buy with their income. - Example: Comparing how many toys you can buy with your pocket money in different countries. 2. **Export Diversification:** - Having a variety of things to sell to other countries. - Example: Like a kid who trades not just toys but also candies and comics. 3. **Degree of Integration into the Global Financial System:** - How much a country is connected to the world's money systems. - Example: Like how many friends you have to trade toys with across the playground. ### Important One-Liners for Exams: - The World Bank classifies economies based on GNI per capita. - India\'s GNI per capita is \$2,500 nominally, placing it in the \"Lower Middle\" income group. - IMF uses per capita income, export diversification, and financial integration to classify countries. - India's GNI per capita is about \$9,000 using PPP. ### Important Summary: - World Bank and IMF classify countries to determine economic status and lending eligibility. - GNI per capita is crucial for World Bank classification. - IMF focuses on per capita income, export variety, and global financial ties. ### Important Dates and Events: - Classification changes yearly based on updated GNI per capita data. - 2022 data used for current classifications. - \#\#\# Inflation Indices Explained - - \#\#\# What is an Index? - An index is a number that shows how much something has changed over time. For example, we can use an index to see how much prices, wages, or stock market values have gone up or down. - - \#\#\# What is an Inflation Index? - An inflation index measures how much prices in an economy are rising. We use a base year for comparison, and the base year's index is usually set at 100. If prices go up, the index number goes up. For example, if the index is 100 in 2010 and prices go up by 10% in 2011, the index will be 110 in 2011. - - \#\#\# Types of Inflation Indices in India - - 1\. \*\*Consumer Price Index (CPI)\*\* - \- \*\*CPI measures the price changes for things that people buy.\*\* - \- \*\*Different Types of CPI in India:\*\* - \- \*\*CPI - Industrial Workers (CPI-IW):\*\* Measures price changes for things industrial workers buy. - \- \*\*CPI - Agricultural Labourers (CPI-AL):\*\* Measures price changes for things agricultural workers buy. - \- \*\*CPI - Rural Labourers:\*\* Measures price changes for things rural laborers buy. - \- \*\*Other CPIs:\*\* - \- \*\*CPI - Rural:\*\* Measures price changes for things rural people buy. - \- \*\*CPI - Urban:\*\* Measures price changes for things urban people buy. - \- \*\*CPI - Combined:\*\* Combines CPI Rural and CPI Urban. - \- \*\*Consumer Food Price Index (CFPI):\*\* Measures price changes for food items. - \- \*\*Published by:\*\* Labour Bureau and National Statistical Office (NSO). - \- \*\*Base Year:\*\* 2011-12. - - 2\. \*\*Wholesale Price Index (WPI)\*\* - \- \*\*WPI measures the price changes at the wholesale level, where goods are sold in bulk.\*\* - \- \*\*Published by:\*\* Office of Economic Advisor, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry. - \- \*\*Base Year:\*\* 2011-12. - \- \*\*Three Major Groups:\*\* - \- \*\*Primary Articles:\*\* Agricultural commodities and minerals (Weight: 22.62%). - \- \*\*Fuel and Power:\*\* Energy-related items (Weight: 13.15%). - \- \*\*Manufactured Products:\*\* Factory-made items (Weight: 64.23%). - - 3\. \*\*GDP Deflator\*\* - \- \*\*GDP Deflator measures the change in overall prices in the economy by comparing nominal GDP to real GDP.\*\* - \- \*\*Example:\*\* If India produces 10kg of wheat at Rs. 10 in 2012 and 11kg at Rs. 10.5 in 2013, the GDP deflator shows the price change. - \- \*\*Formula:\*\* GDP Deflator = Nominal GDP / Real GDP. - \- \*\*Published by:\*\* NSO, quarterly. - - \#\#\# Key Points for Exams - \- \*\*CPI:\*\* Measures retail price changes, includes services. - \- \*\*WPI:\*\* Measures wholesale price changes, does not include services. - \- \*\*GDP Deflator:\*\* Measures overall price changes in the economy, excludes imported goods. - \- \*\*Base Year:\*\* 2011-12 for both CPI and WPI. - - \#\#\# Important Summary - \- Indices measure changes in prices over time. - \- CPI, WPI, and GDP Deflator are the main inflation indices in India. - \- Each index serves a different purpose and covers different aspects of the economy. - - \#\#\# Important Dates and Events - \- \*\*Monthly Publication:\*\* CPI and WPI are published monthly. - \- \*\*Quarterly Publication:\*\* GDP Deflator is published quarterly. - - \#\#\# Important Quotations - \- \*\*\"Inflation is measured to understand how prices change over time in an economy.\"\*\* BANKING CHAPT 3 Money and Banking -- Part II............................................................................... 125 3.1 History of Indian Banking and Reforms................................................ 125 3.2 Relationship between RBI and Government of India......................... 130 3.3 Should large corporate be allowed to open their own banks?\...\...\.... 131 3.4 Financial Stability and Development Council (FSDC)........................ 133 3.5 Development Financial Institutions (DFIs)........................................... 133 3.6 Categorization of Loans............................................................................ 134 3.7 SARFAESI Act 2002................................................................................... 136 3.8 NPA Crisis and Bad Bank.......................................................................... 137 3.9 RBI Circular (June 2019) on Resolution of NPAs................................ 138 3.10 Insolvency and Bankruptcy Code 2016................................................. 139 3.11 Advance Pricing Agreement (APA) **History of Indian Banking and Reforms** 1. **18th-19th Century: Early Banks** - English Agency Houses founded in Calcutta and Bombay. - Presidency Banks: Bank of Bengal (1806), Bank of Bombay (1840), Bank of Madras (1843). 2. **20th Century: Major Developments** - Imperial Bank of India formed by merging the three presidency banks in 1921. - Functioned as a commercial and quasi-central bank until RBI was established in 1935. 3. **Post-Independence (1947)** - Banking system had over 600 commercial banks. - Government nationalized Imperial Bank, creating State Bank of India (SBI) in 1955 to serve broader economic needs. 4. **Nationalization in 1969** - 14 major banks nationalized to control the economy and meet developmental needs. - Objectives: branch expansion and channeling credit to priority sectors. 5. **Second Nationalization in 1980** - Six more banks nationalized. - Public sector banks held 92% of deposits. - Increased priority sector lending target to 40%. 6. **Challenges (1969-1991)** - Banks faced unprofitability, inefficiency, and unsoundness. - Reasons: stringent regulatory requirements, directed lending, low interest rates on government bonds, and lack of competition. 7. **Narasimhan Committee - I (1991)** - Reforms to reduce Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). - Gradual deregulation of interest rates. - Phasing out directed credit programs. - Establishment of Asset Reconstruction Company (ARC). 8. **Narasimhan Committee - II (1997)** - Greater autonomy for public sector banks. - Encouraged mergers of large banks. - Raised capital adequacy norms. - Suggested RBI focus solely on regulation, not ownership. 9. **Nachiket Mor Committee (2013)** - Universal banking access for all adults. - Aadhaar-based bank accounts. - Easy access to payment points and suitable financial products. 10. **P J Nayak Committee (2014)** - Suggested creating a Bank Investment Company (BIC) to hold government stakes in public sector banks. - Recommended forming Banks Board Bureau (BBB) as an interim measure, later replaced by Financial Services Institutions Bureau (FSIB). Relationship between RBI and Government of India Simple Explanation RBI Structure and Governance: The RBI's Central Board consists of 21 members, including the Governor, four Deputy Governors, and other directors and government officials nominated by the Centre. The Governor is appointed by the Prime Minister in consultation with the Finance Minister and derives his powers from the RBI Act, not from the Central Board. The Central Board provides advice and broader vision, but policy decisions are made by the Governor and Deputy Governors. RBI and Government Relationship: The RBI and the Government of India work in coordination but have distinct roles. The government can use Section 7 of the RBI Act to issue written directives to the RBI, but this power has never been used. The RBI maintains a certain degree of independence to ensure a separation between the creator of money (RBI) and the spender (Government). Despite its independence, the RBI is ultimately accountable to the government, which in turn is accountable to the public. Previous Governors' Views: Dr. Manmohan Singh: The RBI Governor should follow the finance minister's direction unless willing to resign. Bimal Jalan: The RBI should operate within the framework set by the government. D. Subbarao: The RBI is autonomous within the limits of the RBI Act, but not absolutely autonomous. Y. V. Reddy: The RBI has operational freedom but should consult with the government on policy matters. Section 7, though unused, serves as a reminder of the government\'s ultimate authority. Important Pointers for Exams RBI's Central Board Composition: Governor Four Deputy Governors Four Directors (from regional boards) Ten directors nominated by the Centre Two government officials nominated by the Centre RBI Governor's Powers: Derived from the RBI Act Appointed by Prime Minister with Finance Minister's consultation Section 7 of the RBI Act: Allows the government to issue directions to the RBI Has never been used in RBI's history RBI's Autonomy: Maintains independence for monetary policy Accountable to the government Exists within a framework set by the government Explanation of Each Point in Simple Language Background: India's Banking Sector: Compared to other major economies, India's banking sector is underdeveloped. The total value of all assets in Indian banks is less than 70% of the country's GDP, while in countries like China, it's closer to 175%. Credit to Private Sector: Indian banks provide credit (loans) to the private sector equal to about 50% of GDP. In contrast, this figure is over 150% in other large economies like China and the US. Need for Growth: For the Indian economy to grow, especially the private sector, more money (credit) is needed. However, public sector banks in India are struggling with bad loans (NPAs) and are not able to provide enough credit. This has led to the suggestion that large corporations, which have more money, could own banks and provide the necessary credit. Risks of Allowing Large Corporates to Own Banks: Conflict of Interest (Inter-connected Lending): Problem: If a corporate group owns a bank, it might use the bank's money to lend to its own companies or to friends and allies (this is called inter-connected lending). This is unfair and can lead to these companies getting better loan terms than others, creating an imbalance in the economy. Consequence: This could make it harder for other businesses to get loans and could lead to a dangerous concentration of power within a few large corporate groups. Monitoring Inter-connected Lending: Problem: Even if laws are in place, it would be very hard for the RBI to track and prevent such lending because corporates can hide their transactions using complicated company structures, both within India and internationally. Consequence: Keeping an eye on these transactions would require help from various law enforcement agencies, but large corporations might use their political influence to prevent effective monitoring. RBI's Response Dilemma: Problem: If the RBI discovers inter-connected lending, taking action could cause people to panic and withdraw their deposits from the bank, which could lead to the bank collapsing. Consequence: This puts the RBI in a tough position, as taking steps to stop the lending could destabilize the bank. Past Examples: Problem: Cases like ICICI Bank, Yes Bank, and DHFL involved similar issues where loans were continuously given to the same borrowers to help them pay off old loans (this is called "ever-greening"). This practice can lead to financial trouble for the bank. Consequence: These examples show how interconnected lending can create serious problems for the banking sector. Risks from Non-bank Entities: Problem: If a corporate group's non-banking businesses (like a factory or an insurance company) run into financial trouble, it could harm the bank owned by that corporate group because people might lose trust in the bank. Consequence: To protect depositors, the government might need to step in with public funds, which could strain government finances further. Difference Between Banks and NBFCs: Problem: Unlike Non-Banking Financial Companies (NBFCs), which are often owned by corporates but don't take deposits from the public, banks do take public deposits. This makes it much riskier if a corporate-owned bank faces financial issues. Consequence: The failure of such a bank could have a much larger impact because it involves public money. Conclusion: Separation of Roles: It's safer to keep large corporates (borrowers) and banks (lenders) separate. However, if corporates are allowed to own banks, there must be strong safeguards and regulations in place to prevent misuse and ensure financial stability. Explanation of Each Point in Simple Language Introduction to FSDC: Purpose: The Financial Stability and Development Council (FSDC) was created by the Government of India in December 2010 to maintain financial stability, ensure better coordination between financial regulators, and promote the development of the financial sector. Non-Statutory Body: FSDC is not established by law (not a statutory body); instead, it was created through a government notification, meaning it doesn't have its own law but still holds important responsibilities. Composition of FSDC: Chairman: The Finance Minister of India is the head of the FSDC. Members: The council includes heads of key financial regulatory bodies in India: RBI: Reserve Bank of India. SEBI: Securities and Exchange Board of India. PFRDA: Pension Fund Regulatory and Development Authority. IRDAI: Insurance Regulatory and Development Authority of India. IBBI: Insolvency and Bankruptcy Board of India. Other Members: Chief Economic Advisor, Secretaries from the Ministries of Finance, IT, and Corporate Affairs. Experts: The FSDC can also invite experts to its meetings when necessary. Key Functions of FSDC: Financial Stability: Objective: To ensure that India's financial system remains stable and doesn't face crises. Financial Sector Development: Objective: To help in the growth and improvement of India's financial sector. Inter-Regulatory Coordination: Objective: To make sure all financial regulators (like RBI, SEBI) work together smoothly to avoid overlapping and gaps in regulation. Financial Literacy: Objective: To educate the public about financial matters so that they can make better financial decisions. Financial Inclusion: Objective: To ensure that all sections of society have access to financial services like banking, insurance, and investments. Macro-Prudential Supervision: Objective: To keep an eye on the overall economy, especially large financial groups, to prevent risks that could harm the financial system. International Coordination: Objective: To manage India's relationships with international financial organizations like the Financial Action Task Force (FATF) and Financial Stability Board (FSB). Other Matters: Objective: To address any other issues related to financial stability and development that the members or Chairperson believe are important. 2\) Important Pointers for Exams Establishment Year: 2010, through a government notification. Non-Statutory Body: FSDC does not have a legal backing but plays a crucial role. Composition: Chaired by the Finance Minister; includes heads of RBI, SEBI, IRDAI, PFRDA, IBBI, and others. Functions: Financial Stability. Financial Sector Development. Inter-Regulatory Coordination. Financial Literacy & Inclusion. Macro-Prudential Supervision. International Coordination. Introduction to Development Financial Institutions (DFIs): Role of Financial System: A strong financial system helps the economy grow by gathering resources (like money) and channeling them to productive uses (like building infrastructure or supporting businesses). Gaps in Developing Countries: In developing countries, the financial system often has gaps. For example, there might not be enough long-term funding for infrastructure, agriculture, or small businesses. This is where DFIs come in---they fill these gaps. Purpose of Development Finance: Gap-Filling: DFIs are created to fill in the gaps where regular financial markets and institutions fall short, especially in providing funds for specific sectors that are important for economic growth. Market Failures: Sometimes, regular financial institutions don't provide financing because the expected returns are too low or the risk is too high. DFIs step in to support these areas despite the risks, often because the projects have a higher social return (benefit to society). What are DFIs?: Definition: DFIs are institutions supported or created by the government to provide finance to specific sectors of the economy that need development. Balanced Approach: DFIs operate by balancing commercial practices (like any private financial institution) with their development goals (like supporting long-term projects that may not be highly profitable but are crucial for development). Project-Based Lending: DFIs focus on the viability of the project itself rather than the borrower's collateral. This means they prioritize whether the project can succeed and generate returns rather than relying solely on the borrower's assets as security. Additional Support: Beyond just providing loans, DFIs often offer equity capital, guarantees, and even help improve the management and operational capabilities of the projects they finance. Partnership Role: DFIs don't just provide funds and walk away---they maintain a continuous relationship with the projects they support, acting more like a partner than just a lender. Long-Term Finance: DFIs are crucial in providing long-term finance and supporting sectors of the economy that carry higher risks than traditional financial institutions are willing to bear. History and Development of DFIs in India: Post-Independence Need: After India gained independence, there was a need for institutions that could help raise the investment rate to support economic development. Role of RBI: The Reserve Bank of India (RBI) was given the responsibility to create a financial structure that could mobilize resources and direct them to key sectors as per the priorities of India's Five-Year Plans. Early DFIs: IFCI: The first DFI, Industrial Finance Corporation of India (IFCI), was established in 1948. SFCs: State Financial Corporations (SFCs) were created at the state level following the SFCs Act, 1951. Other Key DFIs: ICICI Ltd. (1955) LIC (1956) IDBI (1964) NABARD, SIDBI, EXIM Bank, etc., were also set up as DFIs. Non-Standardized Term: The term "DFI" is not legally standardized, meaning there isn't a single definition that applies in all situations. Flowchart/Mind Map Development Financial Institutions (DFIs) Role: Fill gaps in the financial system. Provide long-term finance. Support high-risk sectors. Features: Government Supported. Balance Commercial Norms and Development Goals. Project-Based Lending. Continuous Partnership with Projects. Provide Equity, Loans, Guarantees. History: First DFI in India: IFCI (1948). Key DFIs: ICICI, LIC, IDBI, NABARD, SIDBI, EXIM Bank. Focus Sectors: Infrastructure Agriculture SMEs \#\#\# Key Terms Related to Loan Categorization 1\. \*\*Assets for Banks\*\*: \- Loans and advances given by banks are considered assets because they represent money the bank expects to receive back, including interest. 2\. \*\*Loan Classification\*\*: \- \*\*Standard Assets\*\*: Loans that are performing well, meaning the borrower is paying back the principal and interest on time. \- \*\*Non-Performing Assets (NPAs)\*\*: Loans for which the borrower hasn\'t paid either interest or principal for more than 90 days. 3\. \*\*Restructured Loan\*\*: \- A loan that has been modified to give the borrower easier repayment terms, such as a longer repayment period or a lower interest rate. This is often done for loans that were previously non-performing. 4\. \*\*Write-off\*\*: \- When a bank removes a loan from its balance sheet because it doesn\'t expect to recover the money. The debt still exists, but it\'s not counted as an asset. 5\. \*\*Default\*\*: \- When the borrower fails to repay the loan or any installment that is due. 6\. \*\*Stressed Assets\*\*: \- This is a broad category that includes NPAs, restructured loans, and written-off assets. 7\. \*\*Secured Debt\*\*: \- A loan that is backed by collateral, meaning the lender has a claim on some property (physical like a house or financial like shares) if the borrower defaults. 8\. \*\*Security Interest\*\*: \- The legal claim on the property that secures a debt. 9\. \*\*Secured Creditor\*\*: \- A bank or financial institution that has a security interest in a borrower's property. 10\. \*\*Security Agreement\*\*: \- A document that creates a security interest, like a mortgage. 11\. \*\*Secured Asset\*\*: \- The property (physical or financial) that is used as collateral for a secured debt. 12\. \*\*Asset Reconstruction Company (ARC)\*\*: \- A company that buys bad loans from banks and tries to recover the money or convert the loans into marketable securities. 13\. \*\*Asset Reconstruction\*\*: \- The process by which an ARC buys the rights or interest in a bad loan from a bank to recover the debt. 14\. \*\*Securitization\*\*: \- The process of converting illiquid assets, like bad loans, into securities that can be sold in the market. These terms help understand how banks manage loans, especially when loans start to underperform or go bad. They highlight the various strategies banks and financial institutions use to mitigate risk and recover funds. Explanation of the NPA Crisis and the Concept of a Bad Bank Background of the NPA Crisis: During the 2000s, many banks in India gave out large amounts of loans, leading to rapid economic growth. However, the Global Financial Crisis in 2008 and subsequent domestic issues caused many of these loans to turn into Non-Performing Assets (NPAs), meaning borrowers couldn't repay their loans. As NPAs started increasing after 2013, the Reserve Bank of India (RBI) took strict actions to manage this crisis. Various schemes and laws, like the Insolvency and Bankruptcy Code (IBC) of 2016, were introduced to handle bad loans. However, sending every bad loan to the National Company Law Tribunal (NCLT) under IBC is not practical. Idea of a Bad Bank: The Economic Survey of 2017 suggested creating a centralized entity to manage the growing number of NPAs. Due to the COVID-19 pandemic, which worsened the financial situation, the establishment of a 'bad bank' became even more relevant. In 2021, the Indian government created the National Asset Reconstruction Company Ltd. (NARCL), a government-owned entity, to act as a 'bad bank'. It is 51% owned by Public Sector Banks and 49% by private sector lenders. Alongside NARCL, the India Debt Resolution Company Ltd. (IDRCL) was set up as a private entity. How the Bad Bank Works: Purchase of NPAs: The bad bank (NARCL) buys bad loans from commercial banks. For example, if State Bank of India (SBI) had a loan of ₹1,000 crore that turned into an NPA, NARCL would buy this loan. However, instead of paying ₹1,000 crore, NARCL might estimate that it can only recover ₹300 crore and offers to buy the loan for this amount. Payment Process: NARCL pays 15% of the agreed amount (₹45 crore) in cash and issues securities for the remaining 85% (₹255 crore). These securities are like IOUs that will be paid when NARCL successfully recovers money from the bad loan. Government Guarantee: If NARCL cannot recover the expected amount (₹300 crore) and faces a loss, the government guarantees to cover the shortfall, ensuring that banks like SBI don't lose more money. Role of a Bad Bank: A bad bank helps commercial banks clean up their balance sheets by taking over bad loans, allowing them to focus on regular banking activities like giving new loans and taking deposits. Unlike commercial banks, bad banks don't engage in lending or deposit-taking but specialize in recovering bad loans. The involvement of the government in funding and managing the bad bank is crucial as it brings credibility and speeds up the process of resolving bad loans. Impact on the Economy: By transferring NPAs to a bad bank, commercial banks free up their capital, which they can then use for new lending. This promotes investment and economic growth. However, simply moving bad loans to a bad bank doesn't reduce the overall amount of bad loans in the economy. The bad bank must work effectively to recover or resolve these bad loans. Important Points for Exams: NARCL: A government-owned bad bank, acting as an Asset Reconstruction Company (ARC). IDRCL: A private entity working alongside NARCL to manage and resolve bad loans. Government Guarantee: Ensures that banks don't suffer further losses if the bad bank cannot recover the full amount of the bad loan. Freeing of Capital: Bad banks help commercial banks by removing NPAs from their balance sheets, allowing them to lend more and support economic growth. 2021 Creation: NARCL and IDRCL were created in 2021 as part of the government's effort to tackle the NPA crisis worsened by the COVID-19 pandemic. Flowchart/Mind Map for Easy Understanding: Credit Boom & Crisis → Loans given during 2000s → Global Financial Crisis 2008 → Increase in NPAs. Government Response → RBI Actions → Insolvency & Bankruptcy Code (IBC) 2016. Economic Survey 2017 → Suggestion for a Bad Bank. Creation of NARCL & IDRCL in 2021 → Government & Public-Private Ownership. Functioning of Bad Bank → Purchase of NPAs → Partial Cash Payment & Issuance of Securities → Recovery Process. Outcome → Cleans Banks' Balance Sheets → Allows Banks to Lend More → Stimulates Economic Growth. ### Explanation of RBI Circular (June 2019) on Resolution of NPAs 1. **Starting the Review Process**: - When a borrower fails to make payments on their loan (default), lenders must begin reviewing the borrower\'s account within 30 days of the default. - During this 30-day review period, lenders decide on a resolution strategy, which includes creating a resolution plan (RP) and figuring out how to implement it. 2. **Inter-Creditor Agreement (ICA)**: - If lenders decide to implement the RP, they must sign an inter-creditor agreement (ICA) within the review period. - This ICA sets the rules for finalizing and implementing the RP. - Any decision made by lenders representing 75% of the total loan value and 60% of the lenders by number will be binding on all lenders. 3. **Implementation Timeline**: - The RP must be implemented within 180 days from the end of the 30-day review period. - If banks delay implementing a viable resolution plan, they face penalties: - Additional provision of 20% if the RP is not implemented within 180 days. - An additional 15% if not implemented within 365 days from the start of the review period. 4. **Incentives for Using IBC Code**: - If banks pursue resolution through the Insolvency and Bankruptcy Code (IBC), they can reverse the additional provisions. - Half of the additional provisions can be reversed when the insolvency application is filed. - The remaining provisions can be reversed once the case is admitted for insolvency proceedings. - This incentivizes banks to use the IBC for quicker resolution of NPAs. 5. **Applicability**: - These guidelines apply to Scheduled Commercial Banks (excluding Regional Rural Banks), Small Finance Banks, Non-Banking Financial Companies (NBFCs), and Development Financial Institutions like NABARD, SIDBI, EXIM Bank, and NHB. 6. **Amendments to Banking Regulation Act 1949**: - The Central Government can authorize the RBI to direct banks to start the insolvency resolution process under the IBC for specific defaults. - The RBI can issue directions to any bank for the resolution of stressed assets. - The Supreme Court ruled on April 2, 2019, that the RBI can direct banks to use the IBC only with central government authorization and for specific defaults. General directions are not allowed under Section 35AA of the Banking Regulation Act 1949. ### Important Points for Exams: - **Review Period**: 30 days after default. - **Inter-Creditor Agreement (ICA)**: Binding decisions by lenders with 75% loan value and 60% in number. - **Implementation Period**: 180 days to implement the RP. - **Penalties**: Additional provisions of 20% after 180 days and 15% after 365 days. - **IBC Incentives**: Reversal of provisions when insolvency application is filed and admitted. - **Applicability**: Scheduled Commercial Banks, Small Finance Banks, NBFCs, Development Financial Institutions. - **Supreme Court Ruling**: RBI needs central government authorization to direct banks under IBC for specific defaults. ### Flowchart/Mind Map for Easy Understanding: 1. **Default by Borrower**: - Start 30-day Review Period - Decide on Resolution Plan (RP) 2. **Inter-Creditor Agreement (ICA)**: - Sign ICA within Review Period - Binding if 75% value and 60% in number agree 3. **Implementation**: - Implement RP within 180 days - Penalties for Delay: - 20% additional provision after 180 days - 15% additional provision after 365 days 4. **IBC Code**: - Incentives for using IBC: - Reversal of provisions on filing and admission of insolvency 5. **Applicability**: - Scheduled Commercial Banks, Small Finance Banks, NBFCs, Development Financial Institutions 6. **Legal Framework**: - Central Government can authorize RBI for insolvency directions - Supreme Court ruling on specific defaults \#\#\# Insolvency and Bankruptcy Code (IBC) 2016 \#\#\#\# \*\*Key Concepts\*\* \- \*\*Insolvency\*\*: Situation where an individual or company is unable to pay their debts. \- \*\*Bankruptcy\*\*: Legal procedure to liquidate a business or property when debts cannot be paid from current assets. \#\#\#\# \*\*Background\*\* \- \*\*Pre-IBC Era\*\*: Multiple overlapping laws and forums (e.g., Company Law Boards, Debt Recovery Tribunal, SARFAESI Act 2002) caused delays and inefficiencies in addressing financial failures. \- \*\*IBC Introduction (May 2016)\*\*: Designed to streamline and expedite insolvency resolution and debt recovery. \#\#\#\# \*\*IBC Procedure\*\* 1\. \*\*Initiation\*\*: \- Either a creditor (financial or operational) or the corporate debtor can initiate the corporate insolvency resolution process (CIRP) if the default amount exceeds Rs. 1 crore. \- Application is filed with the National Company Law Tribunal (NCLT) after a 10-day demand notice to the debtor. 2\. \*\*Resolution Timeline\*\*: \- \*\*Initial Process\*\*: CIRP must be completed within 180 days (can be extended by 90 days in complex cases). \- \*\*Legal Proceedings\*\*: If involved, the process extends to 330 days, with possible further extensions in exceptional cases. 3\. \*\*Role of NCLT\*\*: \- Appoints Insolvency Professionals (IPs), who are confirmed by the Insolvency and Bankruptcy Board (IBB). \- Makes a public announcement and invites claims from creditors. \- The Committee of Creditors (CoC) decides on the resolution plan by a 66% majority (by value). 4\. \*\*Resolution Plan\*\*: \- Can include debt restructuring, asset sales, mergers, or liquidation. \- Must be approved by NCLT after being agreed upon by the CoC. \- If the resolution plan is not approved or implemented, the debtor's assets are liquidated. 5\. \*\*Committee of Creditors (CoC)\*\*: \- Consists only of financial creditors. \- Decides how resolution proceeds are distributed among financial and operational creditors. \- NCLT has limited judicial review over CoC decisions, focusing on procedural fairness. 6\. \*\*Four Pillars of IBC\*\*: \- \*\*Insolvency Professionals\*\*: Regulated by Insolvency Professional Agencies. \- \*\*Information Utilities\*\*: Maintain electronic databases on lending and borrowing to avoid disputes. \- \*\*Adjudication\*\*: Handled by NCLT for companies and Debt Recovery Tribunal (DRTs) for individuals. \- \*\*Regulator\*\*: Insolvency and Bankruptcy Board (IBB) oversees insolvency professionals, agencies, and information utilities. 7\. \*\*Employee Protection\*\*: \- Salaries for up to 24 months have priority in liquidation proceedings. 8\. \*\*Exclusions\*\*: \- Initially excluded financial service providers (e.g., banks, insurance companies). However, Section 227 (Nov 2019) allowed NBFCs with assets over Rs. 500 crores to be resolved under IBC. 9\. \*\*Pre-Pack Scheme (Amendment 2021)\*\*: \- For MSMEs with defaults below Rs. 1 crore. \- Allows existing promoters to retain management control and submit a resolution plan. \- If the plan doesn't fully recover operational creditors' dues, a "Swiss Challenge" auction process is used. \#\#\#\# \*\*Comparison: Pre-Pack vs. CIRP\*\* \| Feature \| Pre-Packaged Insolvency Resolution Process (PIRP) \| Corporate Insolvency Resolution Process (CIRP) \| \|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--\|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--\|\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--\| \| Initiation \| Only by corporate debtors \| By either corporate debtors or creditors \| \| Resolution Plan \| Submitted by existing management \| Public bidding process \| \| Management Control \| Retained by existing management \| Transferred to Resolution Professionals \| \| Applicability \| Defaults less than Rs. 1 crore \| Defaults more than Rs. 1 crore \| \| Timeframe \| 120 days \| 180 days \| Comparison: Pre-Pack vs. CIRP Feature Pre-Packaged Insolvency Resolution Process (PIRP) Corporate Insolvency Resolution Process (CIRP) Initiation Only by corporate debtors By either corporate debtors or creditors Resolution Plan Submitted by existing management Public bidding process Management Control Retained by existing management Transferred to Resolution Professionals Applicability Defaults less than Rs. 1 crore Defaults more than Rs. 1 crore Timeframe 120 days 180 days \#\#\#\# \*\*Challenges and Remarks\*\* \- \*\*Resolution Rate\*\*: Only 15% of cases ended in resolution; the rest went to liquidation. \- \*\*Delays\*\*: Limited NCLT benches causing delays. \- \*\*Cross-Border Insolvency\*\*: Not yet implemented. \*\*Comment\*\*: The IBC aims to improve the insolvency process, enhance business environment, and provide a robust framework for debt resolution, thereby boosting India's credit market and ease of doing business. \#\#\# Sample MCQs 1\. \*\*Who can initiate the Corporate Insolvency Resolution Process (CIRP)?\*\* \- a) Only corporate debtors \- b) Only financial creditors \- c) Both corporate debtors and creditors \- d) Only operational creditors \*\*Answer\*\*: c) Both corporate debtors and creditors 2\. \*\*What is the maximum time allowed for completing the CIRP, including legal proceedings?\*\* \- a) 180 days \- b) 330 days \- c) 360 days \- d) 365 days \*\*Answer\*\*: b) 330 days 3\. \*\*Which body appoints Insolvency Professionals (IPs)?\*\* \- a) National Company Law Tribunal (NCLT) \- b) Insolvency and Bankruptcy Board (IBB) \- c) Committee of Creditors (CoC) \- d) Debt Recovery Tribunal (DRT) \*\*Answer\*\*: a) National Company Law Tribunal (NCLT) 4\. \*\*In the Pre-Pack scheme, what happens if the resolution plan does not offer full recovery to operational creditors?\*\* \- a) The plan is automatically accepted \- b) A Swiss Challenge auction process is conducted \- c) The plan is rejected \- d) The company goes into liquidation \*\*Answer\*\*: b) A Swiss Challenge auction process is conducted 5\. \*\*Which of the following was excluded from IBC 2016 until Section 227 was notified?\*\* \- a) Manufacturing companies \- b) Financial Service Providers (FSPs) \- c) IT companies \- d) Retail businesses \*\*Answer\*\*: b) Financial Service Providers (FSPs) \#\#\# Difficult Words and Their Meanings 1\. \*\*Liquidation\*\*: The process of winding up a company's affairs by selling its assets to pay off its debts. 2\. \*\*Adjudication\*\*: The legal process of resolving disputes or cases. 3\. \*\*Resolution Plan\*\*: A plan to resolve a company's insolvency issues, which may include restructuring or liquidation. 4\. \*\*Swiss Challenge\*\*: A bidding process where a revised plan is put out for competitive bidding. 5\. \*\*Pillar\*\*: A fundamental principle or component of a system or structure. \*\*Advance Pricing Agreement (APA)\*\* An APA is a proactive agreement between a taxpayer and tax authorities to pre-set the pricing for related-party transactions, following the arm's length principle to prevent profit shifting and base erosion. This pre-determined pricing, typically valid for several years, reduces disputes and litigation by ensuring that both parties agree on the pricing method for intra-group transactions. \*\*Key Aspects of APA:\*\* 1\. \*\*Arm's Length Principle:\*\* Ensures that transactions between related parties are priced as if they were between independent parties, avoiding manipulation for tax benefits. 2\. \*\*Purpose:\*\* To avoid base erosion and profit shifting (BEPS) by setting fair market prices for transactions between companies in different tax jurisdictions. 3\. \*\*Agreement Duration:\*\* Usually valid for multiple years, providing stability and predictability for taxpayers and tax authorities. 4\. \*\*Benefits:\*\* Reduces disputes, lowers litigation costs, enhances tax revenue, and makes countries attractive for foreign investment. \*\*Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI):\*\* \- \*\*Purpose:\*\* Modifies existing tax treaties to address BEPS by ensuring profits are taxed where economic activities generating them occur. \- \*\*India's Ratification:\*\* India ratified the MLI in June 2019, with implementation starting from October 1, 2019. It modifies India's tax treaties to curb tax avoidance strategies and align with global standards. \*\*Bilateral Investment Treaties (BIT):\*\* \- \*\*Definition:\*\* Agreements between two countries promoting and protecting investments in each other's territories. \- \*\*Benefits:\*\* Includes national treatment, fair and equitable treatment, protection from expropriation, and access to neutral dispute resolution. \- \*\*India's BITs:\*\* India signed its first BIT in 1994 and has signed with over 80 countries. However, it has terminated BITs with 57 countries and revised its model BIT to focus on investments with physical presence and substantial activities, addressing concerns of protectionism. These frameworks aim to enhance tax fairness and investment security, addressing global tax avoidance issues and promoting a transparent investment environment. Explanation in Simple Language Advance Pricing Agreement (APA): What is APA? It's an agreement made between a company and tax authorities to decide in advance the prices for transactions between related companies. Why is it used? To make sure that these prices are fair and similar to what unrelated companies would pay each other. This prevents companies from shifting profits to avoid taxes. How does it work? At the start of the year, the prices are set for a period (usually several years). This avoids disputes and ensures clarity for both the company and tax authorities. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI): What is MLI? A global agreement aimed at changing existing tax treaties to stop companies from avoiding taxes by shifting profits to countries with lower tax rates. What does it do? It ensures that companies pay taxes where their actual economic activities happen. India joined this agreement in June 2019, starting in October 2019. Bilateral Investment Treaties (BIT): What is a BIT? Agreements between two countries to protect and encourage investment in each other's countries. Benefits: These treaties ensure fair treatment, protection from unfair actions like expropriation, and access to international arbitration for resolving disputes. India's BITs: India started with its first BIT in 1994. It has ended treaties with 57 countries and revised its model BIT to focus on substantial business presence rather than just paper investments. 3. Important Pointers for Exams APA: Pre-sets prices for related-party transactions. Follows the arm's length principle. Reduces disputes and litigation. MLI: Modifies tax treaties to prevent BEPS. Ensures profits are taxed where economic activities occur. India ratified it in June 2019. BIT: Promotes and protects investments between two countries. Provides fair treatment and protection from expropriation. India has revised its BIT model to emphasize real business presence. 4. Flowchart or Mind Map Here's a simple flowchart for APA, MLI, and BIT: Advance Pricing Agreement (APA) Agreement: Taxpayer + Tax Authority Purpose: Set fair market prices Benefits: Avoids disputes, reduces litigation Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) Goal: Stop profit shifting Mechanism: Modifies existing treaties Implementation: India from October 2019 Bilateral Investment Treaties (BIT) Purpose: Protect and encourage investments Benefits: Fair treatment, protection, dispute resolution India's Approach: Revised BIT model, focus on substantial presence CHAPTER 2 MONEY AND BANKING Money and Banking- Part I \...\...\...\.... 2.1 Introduction\...\...\...\...\... 2.2 Functions of Money \...\...\...\..... 2.3 Exchange Rate Systems\...\...\...\.... 2.4 Securities \...\...\...\... 2.5 Government Securities\...\...\.... 2.6 Corporate Bond Market in India \...\...\...\..... 2.7 Financial Markets\...\...\...\...\...\..... 2.8 Types of Company\...\...\...\.... 2.9 Accounts and Deposits\...\...\...\... 2.10 Money Supply\...\...\..... 2.11 Money Circulation\...\...\...\... 2.12 Money Creation\...\...\...\...\... 2.13 Monetary Policy\.... 2.14 RBI and its Functions 2.15 RBI's sources of Income and Economic Capital Framework 2.16 Crypto currency and Central Bank Digital Currency (CBDC) 2.17 Indian Financial System......... 2.18 National Strategy for Financial Inclusion (2019-24) 2.19 Base Rate, MCLR and External Benchmark Rate... 2.20 BASEL Norms......... 2.21 Prompt Corrective Action (PCA)... 2.22 Systemically Important Financial Institutions 2.23 Foreign Investment...... 2.24 Currency Swap and Forex Swap 2.25 GIFT (Gujarat International Financial Tech) City... 2.26 Strategic Disinvestment...... 2.27 Balance of Payment (BoP)............... 2.28 Liquidity Trap... 2.29 Inflation...... 2.30 Phillips Curves Role of RBI and Commercial Banks: RBI's Role: The RBI manages the supply of money based on the economy's needs, particularly the expected GDP growth and inflation targets. Commercial Banks: To handle the growing population and the increasing number of transactions, a system of commercial banks was created to act as intermediaries between the RBI and the public. Economic Transactions Evolution Barter System ➜ Need for double coincidence of wants Introduction of Money ➜ Gold/Silver as valuable, limited commodities Problems with Gold ➜ Limited supply, inconvenience of carrying Paper Money ➜ Trust in central authority (RBI) RBI's Role ➜ Manages money supply based on GDP, inflation Commercial Banks ➜ Intermediaries for the public Seigniorage ➜ RBI's profit from currency creation Money Supply and Its Effects on the Economy: Money Supply and Output (GDP): The RBI adjusts the money supply based on the expected output and inflation. Increased Money Supply + Constant/Decreased Output: Leads to higher prices (inflation). Decreased Money Supply + Constant/Increased Output: Leads to lower prices (deflation). Constant Money Supply + Decreased Output: Prices go up. Constant Money Supply + Increased Output: Prices go down. Seigniorage: What is Seigniorage? It's the profit the government (RBI) makes from creating money. This profit comes from three main sources: Interest on Reserves: The RBI earns interest on the assets it holds as backing for the currency in circulation. Bank Reserves: Banks must hold reserves with the RBI, often at lower or no interest, which generates profit for the RBI. Inflation Tax: As inflation reduces the value of money over time, the actual debt or liability of the RBI decreases, effectively benefiting the central bank. Functions of Money: Medium of Exchange ➜ Simplifies buying and selling. Unit of Account ➜ Standardizes measurement of value. Store of Value ➜ Allows wealth to be saved for future use. Before 1993: Fixed and Adjustable Exchange Rate System - Fixed and Adjustable Rate: Before 1993, India used a system where the exchange rate of the rupee was fixed with respect to the US dollar and other major currencies. However, the government could adjust this rate when needed. - Devaluation of Rupee: For example, in 1947, \$1 was equal to Rs. 1. Due to India's ongoing economic problems and higher inflation compared to other countries, the rupee was devalued over time, reaching \$1 = Rs. 31 by 1993. - Purpose of Devaluation: Devaluation was done to improve India's Balance of Payment (BoP) situation by making exports cheaper and imports more expensive. This helped increase demand for Indian goods abroad. After 1993: Floating Exchange Rate System 1. Floating Rate: After 1993, India moved to a floating exchange rate system where the value of the rupee is determined by market forces like demand and supply, without direct control from the Reserve Bank of India (RBI). 2. Market Influence: If foreign investors want to invest in India, they need to buy rupees, increasing demand and causing the rupee to appreciate. Conversely, if they sell their investments and buy foreign currency, the demand for rupees decreases, leading to depreciation. 3. Example of Depreciation: If inflation in India causes prices to rise, the demand for Indian goods (and thus the rupee) may fall. This depreciation makes Indian exports cheaper again, helping to balance the economy. Types of Floating Exchange Rates - Free Float: The central bank never intervenes in the exchange rate, leaving it entirely to market forces. Examples include the US and Japan. - Managed Float: The central bank intervenes occasionally to stabilize the currency. For instance, if the rupee is too volatile or depreciating too quickly, the RBI might sell dollars from its reserves to prevent further depreciation. India uses a managed float system. ### 2. Important Pointers for Exams 1. Fixed and Adjustable Rate (Before 1993): India fixed its exchange rate but adjusted it when necessary to handle economic issues like high inflation. 2. Devaluation: Devaluing the rupee made exports cheaper and helped improve the Balance of Payment situation. 3. Floating Rate (After 1993): Post-1993, the rupee's value is determined by market demand and supply without direct RBI control. 4. Free Float vs. Managed Float: Free float involves no central bank intervention, while managed float involves occasional intervention to stabilize the currency. ### 3. Flowchart or Mind Map for Easy Remembering Exchange Rate Systems in India 1. Before 1993: Fixed and Adjustable Rate System 19. Nominal exchange rate adjusted by the government 20. Frequent devaluation due to inflation and BoP issues 2. After 1993: Floating Exchange Rate System 21. Floating Rate: Determined by market forces 22. Free Float: No intervention (e.g., US, Japan) 23. Managed Float: Occasional intervention by the central bank (e.g., India) Explanation in Simple Language Securities What are Securities? Securities are financial instruments like receipts or slips that promise future returns and can be traded in the market. For example, if someone deposits Rs. 1 lakh in a bank account, they receive an account statement. While this document shows they will receive interest in the future, it is not considered a security because it cannot be sold in the market. Types of Securities: Equity Securities (Stocks/Shares): Represents ownership in a company. Shareholders receive profits in the form of dividends and capital gains (when the share price increases). Shareholders also have voting rights, giving them some control over the company. Debt Securities: Represents borrowed money that must be repaid with interest by a specific date (maturity). Debt security holders receive interest payments and repayment of the principal amount. Example of How Securities Work: Equity Security: If you invest in a company by purchasing its shares, you become a part-owner of the company. If the company performs well, you receive dividends and the value of your shares may increase. However, there's no fixed return; it depends on the company's performance. Debt Security: If you invest in a company by buying its bonds, you lend money to the company at a fixed interest rate for a specific period. The company pays you regular interest, and at the end of the period, it returns your principal amount. Balance Sheet Example of a Company: Let's take the example of a company called "XYZ Pvt. Ltd." Starting with Equity: The owner starts the company by investing Rs. 1 crore. This money is an asset for the company and the company issues shares (ownership documents) worth Rs. 1 crore, which becomes a liability for the company. Balance Sheet: Assets: Rs. 1 crore in cash Liabilities: Rs. 1 crore (Owner's money/shareholders' money) Taking a Loan: The company needs more funds and takes a Rs. 2 crore loan from a bank. The cash is an asset, but the loan is a liability. Balance Sheet: Assets: Rs. 3 crores in cash Liabilities: Rs. 1 crore (Owner's money) + Rs. 2 crores (Bank loan) Issuing Bonds: The company raises Rs. 1 crore by selling bonds to individuals at a 10% interest rate. The cash raised is an asset, and the bonds issued are a liability. Balance Sheet: Assets: Rs. 4 crores in cash Liabilities: Rs. 1 crore (Owner's money) + Rs. 2 crores (Bank loan) + Rs. 1 crore (Bonds) Buying Assets: The company uses its cash to buy buildings and machinery. Balance Sheet: Assets: Rs. 1 crore (Building1) + Rs. 2 crores (Building2) + Rs. 1 crore (Machinery1) Liabilities: Rs. 1 crore (Owner's money) + Rs. 2 crores (Bank loan) + Rs. 1 crore (Bonds) Raising More Equity: New investors buy Rs. 1 crore worth of shares, which the company uses to buy more machinery. Balance Sheet: Assets: Rs. 1 crore (Building1) + Rs. 2 crores (Building2) + Rs. 1 crore (Machinery1) + Rs. 1 crore (Machinery2) Liabilities: Rs. 2 crores (Owner's money) + Rs. 2 crores (Bank loan) + Rs. 1 crore (Bonds) Impact of Profits on Share Value: If the company makes a Rs. 2 crore profit, this profit adds to the company's cash and increases the total value of the company's shares. New Balance Sheet: Assets: Rs. 7 crores (including cash from profit) Liabilities: Rs. 4 crores (Owner's money as shares) + Rs. 2 crores (Bank loan) + Rs. 1 crore (Bonds) Key Takeaways: Equity Securities: Represent ownership; returns depend on company performance. Debt Securities: Represent borrowed money; returns are fixed as interest. Balance Sheet: Shows assets (what the company owns) and liabilities (what the company owes), including both equity and debt securities. 2\. Important Pointers for Exams Securities: Financial instruments promising future returns and tradable in the market. Types: Equity securities (ownership, profits/dividends, voting rights) and debt securities (fixed interest, repayment of principal). Balance Sheet Impact: Equity and debt securities are liabilities on a company's balance sheet; cash, buildings, and machinery are assets. Market Influence: Changes in interest rates affect bond prices in the market. 4. Flowchart or Mind Map for Easy Remembering Securities: Equity Securities: Ownership in a company Dividends & capital gains Voting rights Debt Securities: Loan to the company Fixed interest rate Principal repayment Balance Sheet: Assets: Cash, buildings, machinery Liabilities: Equity (owner's money), debt (loans, bonds) \*\*Government Securities Overview:\*\* Government Securities (G-Secs) are financial instruments issued by the Central or State Governments, primarily as debt securities. These are considered risk-free investments due to the negligible default risk associated with government issuances. The securities are issued and traded in specific markets and have different forms based on their maturity and features. \*\*Types of Government Securities:\*\* 1\. \*\*Treasury Bills (T-bills):\*\* \- \*\*Maturity:\*\* Less than one year. \- \*\*Features:\*\* Zero-coupon instruments issued at a discount and redeemed at face value. \- \*\*Example:\*\* A 91-day T-bill with a face value of ₹100 may be issued at ₹98.20, redeemable at ₹100. 2\. \*\*Cash Management Bills (CMBs):\*\* \- \*\*Maturity:\*\* Less than 91 days. \- \*\*Purpose:\*\* To address temporary cash flow mismatches for the Government. \- \*\*Features:\*\* Similar to T-bills, issued at a discount and traded in the money market. 3\. \*\*Dated Securities:\*\* \- \*\*Maturity:\*\* 5 to 40 years. \- \*\*Categories:\*\* \- \*\*Fixed Rate Bonds:\*\* Fixed interest rate until maturity. \- \*\*Floating Rate Bonds:\*\* Interest rate linked to an index like T-bills yield. \- \*\*Inflation Indexed Bonds:\*\* Principal and interest linked to an inflation index. \- \*\*Special Securities:\*\* Issued to specific entities (e.g., oil companies) instead of cash subsidies. \- \*\*Bank Recapitalization Bonds:\*\* Issued to public sector banks for recapitalization. \- \*\*Sovereign Gold Bonds (SGB):\*\* Linked to the price of gold, allowing for an investment in gold without physical ownership. 4\. \*\*State Development Loans (SDL):\*\* \- \*\*Maturity:\*\* More than one year. \- \*\*Issued by:\*\* State Governments for raising funds. \*\*Government Securities Market:\*\* \- \*\*Regulation:\*\* Managed by the RBI. \- \*\*Primary Market:\*\* Securities are first issued here, facilitated by the RBI through platforms like E-Kuber. \- \*\*Secondary Market:\*\* Securities are traded post-issuance, with platforms like NDS-OM and stock exchanges (BSE/NSE) being prominent. \*\*Retail Direct Scheme (RBI):\*\* \- \*\*Access:\*\* Individual investors can open a Retail Direct Gilt (RDG) Account with the RBI. \- \*\*Investment Opportunities:\*\* Direct purchase of G-Secs, including T-bills, dated securities, SDLs, and SGBs, in both primary and secondary markets. \- \*\*Inclusion:\*\* Aimed at broadening access to government securities, including for small investors. \*\*Inclusion in Global Bond Index:\*\* \- \*\*Benefits:\*\* Allows India to access foreign capital more easily, potentially at lower interest rates. \- \*\*Risks:\*\* Involves exchange rate risks and could lead to rupee volatility. \- \*\*Regulatory Adjustments:\*\* SEBI approval requirements and investment caps for non-residents in G-Secs have been relaxed to facilitate this inclusion. \*\*Conclusion:\*\* Government securities offer a range of investment options with varying maturity periods and risk profiles, primarily serving as a debt-raising mechanism for the government. The evolving landscape, including initiatives like the Retail Direct Scheme and potential inclusion in the Global Bond Index, is making these instruments more accessible to a broader range of investors, both domestic and international. Sure! Let's break down the information on Government Securities into simpler terms, key exam pointers, a flowchart for easy understanding, MCQs, and a glossary of difficult terms. \#\#\# 1. \*\*Simplified Explanation\*\* \*\*Government Securities (G-Secs):\*\* \- \*\*What Are They?\*\* These are like IOUs issued by the government when it needs to borrow money. They promise to pay back the money after a certain time. \- \*\*Risk Level:\*\* Very low because the government is backing them. \*\*Types of Government Securities:\*\* 1\. \*\*Treasury Bills (T-bills):\*\* \- \*\*Maturity:\*\* Less than a year. \- \*\*Interest:\*\* They don't pay regular interest. Instead, you buy them for less than their face value and get the full amount at the end. \- \*\*Example:\*\* Buy for ₹98.20, get ₹100 after 91 days. 2\. \*\*Cash Management Bills (CMBs):\*\* \- \*\*Maturity:\*\* Even shorter than T-bills, less than 91 days. \- \*\*Purpose:\*\* Help the government handle short-term money shortages. 3\. \*\*Dated Securities:\*\* \- \*\*Maturity:\*\* 5 to 40 years. \- \*\*Types:\*\* \- \*\*Fixed Rate Bonds:\*\* Pay a fixed interest rate until they mature. \- \*\*Floating Rate Bonds:\*\* The interest rate can change, usually based on something like T-bill rates. \- \*\*Inflation-Indexed Bonds:\*\* Protect against inflation. The amount you invest and the interest both increase with inflation. \- \*\*Special Securities:\*\* Given to companies like oil or fertilizer companies instead of paying them cash subsidies. \- \*\*Bank Recapitalization Bonds:\*\* Used to give more money to public banks. \- \*\*Sovereign Gold Bonds (SGB):\*\* These are tied to the price of gold. You can invest in gold without actually buying physical gold. 4\. \*\*State Development Loans (SDL):\*\* \- \*\*Maturity:\*\* Over a year. \- \*\*Issued By:\*\* State Governments for funding. \*\*Government Securities Market:\*\* \- \*\*Who Manages It?\*\* The Reserve Bank of India (RBI). \- \*\*Primary Market:\*\* The first place where these securities are sold. \- \*\*Secondary Market:\*\* Where people buy and sell these securities after they've been issued. \*\*Retail Direct Scheme (RBI):\*\* \- \*\*What It Does:\*\* Allows regular people to buy government securities directly from the RBI. \- \*\*Who Can Invest?\*\* Individual investors like you and me, not just big companies. \*\*Inclusion in Global Bond Index:\*\* \- \*\*What's It Mean?\*\* India's government securities might be included in a global list, making it easier for foreign investors to buy them. \- \*\*Risks:\*\* This could expose India to currency risks because the bonds would be in foreign currency. \#\#\# 2. \*\*Important Exam Pointers\*\* \- \*\*Government Securities:\*\* Safe investments backed by the government. \- \*\*Types of Securities:\*\* Know the differences between T-bills, CMBs, dated securities, and SDLs. \- \*\*Dated Securities:\*\* Understand the different categories like fixed-rate bonds, floating rate bonds, and inflation-indexed bonds. \- \*\*Retail Direct Scheme:\*\* Allows individual investors to buy government securities directly. \- \*\*Global Bond Index:\*\* India's inclusion means easier access to foreign capital but brings currency risk. \#\#\# 3. \*\*Flowchart for Easy Remembering\*\* \*\*Flowchart:\*\* \`\`\` Government Securities \| \-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-- -- -- Treasury Bills Dated Securities -- -- Short-term (\