Udaan Economy Prelims 2024 PDF - Physics Wallah

 UDAAN PRELIMS WALLAH (STATIC) ECONOMY QUICK AND COMPREHENSIVE REVISION SERIES FOR PRELIMS 2024 Published By: Physicswallah Private Limited Physics Wallah Publication ISBN: 978-93-6034-261-6 MRP: 249/- Mobile App:...

 UDAAN PRELIMS WALLAH (STATIC) ECONOMY QUICK AND COMPREHENSIVE REVISION SERIES FOR PRELIMS 2024 Published By: Physicswallah Private Limited Physics Wallah Publication ISBN: 978-93-6034-261-6 MRP: 249/- Mobile App: Physics Wallah (Available on Play Store) Website: https://www.pw.live;https://pwonlyias.com/ Email: [email protected] Rights All rights are reserved with the Publisher Disclaimer A team of PW OnlyIAS experts and faculties with a deep understanding of the subject has worked hard for the creation and curation of this book. While the content creators, editors and publisher have used their best efforts in preparing these books. The content has been checked for accuracy. As the book is intended for educational purposes, the author shall not be responsible for any errors contained in the book. The publication has designed the content to provide accurate and authoritative information with regard to the subject matter covered. (This Book shall only be used for educational purposes.)  PREFACE A highly skilled professional team of PW ONLY IAS works arduously to ensure that the students receive the best content for the UPSC exam. A plethora of UPSC study materials are available in the market, but PW ONLY IAS professionals continuously work to provide supreme-quality study material for our UPSC students. From the beginning, the whole content team comprising Content Creators, Reviewers, DTP operators, Proofreaders and others are involved in shaping the material to their best knowledge and experience to produce powerful content for the students. Faculties have adopted a new style of presenting the content in easy-to-understand language and have provided the team with guidance and supervision throughout the creation of this book. PW ONLY IAS strongly believes in conceptual and fun-based learning and provide highly exam-oriented content to bring quality and clarity to the students. This book adopts a multi-faceted approach to mastering and understanding the concepts and equipping the students with the knowledge for this competitive exam. The main objective of the study material is to provide short, crisp, concise and high-quality content to our students. BOOK FEATURES z Holistic coverage of topics, strictly as per exam syllabus. z One-stop solution for prelims based, subject-wise coverage. z Diagrams and Timelines for quick understanding and revision. z Quick Revision Module for the UPSC Prelims examination. z Every topic is structured in headings and bullets for easy understanding of the students.  CONTENTS National Financial Reporting Authority........................19 1. BASICS OF MICROECONOMICS........... 1 z z Insolvency and Bankruptcy Code.....................................19 z Demand Side of Economy.......................................................1 z Non Performing Assets.........................................................19 z Supply Side of Economy..........................................................2 z Capital Adequacy Ratio.........................................................21 z Market Equilibrium and Competition...............................2 z Automated Teller Machine..................................................21 z Theory of the Firm in Microeconomics............................2 z Digital Payment........................................................................21 z Market Intervention in Capitalist Systems......................3 Elasticity..........................................................................................3 z 4. MONETARY POLICY............................ 23 z Some Basic Terms and Concepts.........................................4 z Monetary Policy........................................................................23 2. BASICS OF MACROECONOMICS.......... 5 z Policy Tools to Control Money Supply...........................23 z Transmission of Monetary Policy.....................................25 z Economic Players........................................................................5 z Monetary Policy Stances......................................................26 z Some Basic Concepts of Macroeconomics.......................5 z Methods of Calculating National Income.........................6 z Unconventional Monetary Policy Tools.........................26 z Factor Cost, Basic Prices, and Market Prices.................8 5. INFLATION........................................... 28 z Some Macroeconomic Identities..........................................8 z GDP and Welfare......................................................................10 z Causes of Inflation...................................................................28 z Conclusion...................................................................................10 z Types of Inflation.....................................................................28 z Key Terms and Terminologies...........................................29 3. MONEY AND BANKING....................... 12 z Important Concepts................................................................30 z Functions of Money................................................................12 z Monetary Policy Committee (MPC).................................32 z Modern Forms of Money......................................................12 z Measures to Combat Inflation............................................32 z Demand and Supply of Money...........................................13 z Correlation between Inflation, Fiscal Policy, z Central Bank...............................................................................13 and Monetary Policy..............................................................33 z Deposit Insurance and Credit z Impacts of Inflation................................................................33 Guarantee Corporation..........................................................14 z Commercial Banks...................................................................14 6. FINANCIAL MARKET........................... 35 z Cooperative Banks...................................................................15 z Money Market...........................................................................35 z Differentiated Banks...............................................................15 z Capital Market...........................................................................36 z Development Banks................................................................15 z Indian Capital Market............................................................39 z Basel Norms...............................................................................18 z Institutions with Respect to z Banking Sector Reforms.......................................................18 Securities Market.....................................................................43 7. FISCAL POLICY.................................... 44 z Seeds.............................................................................................72 z Food Distribution.....................................................................72 z Government Budget................................................................46 z Agriculture Market..................................................................73 z Classification of Receipts......................................................48 z Finance/Credit..........................................................................73 z Classification of Expenditure.............................................48 z Minimum Support Price.......................................................73 z Balanced, Surplus, and Deficit Budget...........................50 z Animal Husbandry..................................................................74 z Taxation System........................................................................52 z Land Reforms............................................................................74 z Functions of the GST Council.............................................55 z Major Agreement and Concepts under WTO..............76 z Differences between Tax Evasion and Tax Avoidance............................................................................57 9. INDUSTRY AND INFRASTRUCTURE....78 z Double Taxation Avoidance Agreement (DTAA)..........................................................................................57 z Types of Public Sector Enterprises.................................78 z MSMEs..........................................................................................78 z Base Erosion & Profit Shifting and OECD Framework....................................................................58 z Industrial Policies....................................................................80 z Transfer Pricing & Authority for z Financial Models......................................................................80 Advance Rulings.......................................................................58 z Critical Minerals in India......................................................81 z General Anti-Avoidance Rules (GAAR)..........................58 z Labour Laws...............................................................................81 z Committees on Tax Reforms...............................................58 z Infrastructure............................................................................83 z Tax Buoyancy.............................................................................60 10. SERVICE SECTOR IN INDIA................ 86 z Non-Tax Revenue......................................................................60 z Disinvestment in PSU.............................................................61 z Introduction...............................................................................86 z Fiscal Responsibility and Budget Management z Spread of Service Sector.......................................................86 (FRBM) Act 2003.....................................................................62 z E-commerce in India..............................................................86 z FSLRC (Justice B N Srikrishna Committee, z Startups........................................................................................87 2011).............................................................................................63 z Insurance Sector.......................................................................88 z Government Borrowings......................................................64 z Tourism........................................................................................88 z Monetization of Deficit and Deficit Financing............66 z Telecom Sector..........................................................................89 z Financial Stability and Development z Digital Financial Services.....................................................89 Council (FSDC)..........................................................................67 z Funds Transfer from Union to State...............................67 11. EXTERNAL SECTOR OF INDIA........... 90 z Conclusion...................................................................................69 z Introduction..............................................................................90 z Foreign Exchange Reserve...................................................90 8. AGRICULTURE...................................... 70 z The Foreign Exchange Market...........................................90 z Introduction...............................................................................70 z Balance of Payments (BoP).................................................92 z Agriculture Census..................................................................70 z Important Terminology.........................................................95 z Terminology Related to Cropping....................................70 z Trade Agreement.....................................................................95 z Farming System........................................................................71 z Schemes and Lending Facilities at IMF.........................96 z Irrigation......................................................................................71 z Terms Related to WTO..........................................................96 z Fertilizers.....................................................................................71 z Foreign Currency Borrowings............................................97 z Soil Health Card........................................................................72 z Currency Convertibility.........................................................98 vi 12. INDIAN ECONOMY (1947-1991).....100 z World Trade Organization (WTO)................................111 z WTO and Intellectual Property Rights........................116 z Types of Economic Systems.............................................100 z Important Organizations...................................................117 z The Five-Year Plans..............................................................100 z European Bank for Reconstruction and z Industry and Trade..............................................................102 Development (EBRD)..........................................................121 13. INDIAN ECONOMY: LPG ERA...........104 z Bank for International Settlements (BIS)..................121 z Financial Stability Board (FSB)......................................121 z Introduction............................................................................104 z New Economic Policy (NEP) Introduction................104 15. HUMAN DEVELOPMENT AND z Liberalization..........................................................................104 SUSTAINABLE DEVELOPMENT 122 z Privatisation............................................................................105 z Globalization...........................................................................106 z Human Development..........................................................122 z Indian Economy During Reforms: z Approaches to Human Development...........................122 an Assessment........................................................................107 z Sustainable Development..................................................123 z Conclusion................................................................................107 16. POVERTY AND UNEMPLOYMENT....125 14. INTERNATIONAL FINANCIAL z Poverty.......................................................................................125 INSTITUTIONS 108 z Terminologies Related to Poverty.................................125 z Introduction............................................................................108 z Categorizing Poverty...........................................................126 z Bretton Woods Conference..............................................108 z Socio Economic Caste Census.........................................126 z World Bank Group................................................................108 z Programmes Towards Poverty Alleviation...............127 z International Monetary Fund (IMF)............................110 z Workers and Employment................................................127 z IMF and India.........................................................................111 z Unemployment.......................................................................127 vii  1 Basics of Microeconomics DEMAND SIDE OF ECONOMY in an upward-sloping demand curve, contrary to the fundamental laws of demand which create a downward Law of Demand: The Law of Demand states that, all things being equal, as the price of a good or service increases, sloping demand curve. Examples of Giffen goods can consumer demand for that good or service will decrease, include bread, rice, and wheat. These goods are commonly and vice versa. essentials with few near-dimensional substitutes at the y same price levels 5 Determinants of Demand: It includes price, consumer income, tastes/preferences, prices of related goods, and 4 future expectations. Price (in `) z Substitute goods are pairs of competing goods 3 which, in the opinion of buyers, can replace each 2 other. For example, if tea is costly, buyers may drink coffee. 1 z Complementary goods are pairs of goods that are interdependent or compatible. For example: Bread 0 2 4 6 8 10 12 x and jam, Tea and sugar etc. Quantity Demanded Elasticity of Demand: It measures how quantity (in units) demanded responds to price changes. E.g., if the price of smartphones decreases, consumers Price per unit Price per unit are likely to purchase more smartphones. Conversely, D if the price increases, the demand for smartphones typically drops. This inverse relationship between price T. V. Sets Bread D and quantity demanded is a fundamental principle of P1 L P1 X consumer behavior in economics. However, this law Y M P2 P2 applies only to normal goods. D D Inferior goods : It is an economic term that describes a good whose demand drops when people’s incomes O Q1 Q2 Quantity O Q1 Q2 Quantity rise. These goods fall out of favor as incomes and the per period per period economy improve as consumers begin buying more costly Fig. (a): Elastic Demand Fig. (b): Inelastic Demand substitutes instead. Demand Curve: For any change in price, there is an E.g., cheap cereals and food grains like rice (inferior good) inverse change in quantity demanded will be replaced by better quality food items like eggs, milk Normally, the demand slopes downwards from left to when income rises. right. But there are some unusual demand curves which Giffen goods : A Giffen good is a low income, non-luxury do not obey the law/usual demand curve. For them, a fall product that defies standard economic and consumer in price brings about a contraction of demand and a rise demand theory. Demand for Giffen goods rises when the in price results in an extension of demand. Therefore, the price rises and falls when the price falls. This results demand curve slopes upwards from left to right.  z Veblen Effect-Conspicuous Consumption/Luxury Goods means spending of money on luxury goods and services to display financial power. Demand for Veblen goods increases with rise in their price. For example - A Rolex watch or Rolls Royce car is desirable because of their high price and associated status symbol. z Speculative Effect reverses the demand curve due to expectation of certain future events. If the price of the commodity is increasing then the consumers will buy more of it because of the expectation that it will increase still further. For example: stock markets. SUPPLY SIDE OF ECONOMY Law of Supply: The Law of Supply states that, other things being equal as the price of a good or service Y increases, the quantity supplied of that good or service SS also increases, and vice versa. E.g., If the market price of 5 coffee beans rises, farmers are incentivized to grow more coffee beans,increasing the supply. Conversely, if prices 4 fall, farmers may reduce their coffee production due to Price (in `) 3 lower profitability. This principle illustrates the direct relationship between price and supply in economics. 2 Determinants of Supply: It is influenced by factors like commodity price, production costs, taxes, and profit 1 objectives. X Elasticity of Supply: It indicates the responsiveness of O 5 10 15 20 25 Quantity Supplied (in units) quantity supplied to price changes. Y Y Y S Less Elastic S1 Perfectly Inelastic Unitary Elastic Perfectly E1 S2 O X O X O X S QUANTITY QUANTITY QUANTITY (a) (b) (c) Supply Curve : There is a direct relationship between z Setting the price above the equilibrium leads to a price and quantity supplied. An increase in price, results surplus, where quantity supplied exceeds quantity in an increase in quantity supplied. demanded. To clear inventory, the company must lower the price. MARKET EQUILIBRIUM AND z Conversely, setting the price below equilibrium COMPETITION causes excess demand. The only remedy is to increase the price. Market Equilibrium: It occurs when quantity demanded equals quantity supplied, determining the market price. THEORY OF THE FIRM IN For example, at a bakery, market equilibrium is reached MICROECONOMICS when the amount of bread produced daily is sold out at closing time without leftovers or shortages. Price is The theory of the firm, a microeconomic branch, explores determined at the intersection of the supply and demand diverse organizational structures within industries and curves. draws insights from these structures. 2 Basics of Microeconomics z Perfect Competition: In a perfectly competitive enforced to shield producers. In this scenario, the market, numerous firms produce identical goods; quantity supplied exceeds the quantity demanded No barriers impede entry or exit; Producers and if the minimum price is set above the equilibrium consumers possess perfect market knowledge; In this price. The European Union’s common agricultural scenario, prices and output levels gravitate towards policy, implementing a minimum price system, has equilibrium. The demand curve is perfectly elastic, periodically led to surpluses in the agricultural sector. indicating horizontal demand; Real-life instances of perfect competition are rare, but some financial Managing Consequences: Insights from markets and certain online commerce sectors align Microeconomic Analysis with its principles. While the impact of intervention in the price system may z Monopoly: Monopoly occurs when a single producer not always be universally undesirable, microeconomic dominates the market. Laws often define monopoly analysis emphasizes the need to understand and manage less strictly, considering firms with a specific market the consequences effectively. Society must navigate the share. Monopolies may arise due to statutory rights or implications of such interventions to ensure a balanced government ownership. A monopoly can set its own and efficient economic system. prices, leading to super-normal profits. Government regulation is common to control monopoly power. ELASTICITY z Oligopoly: Oligopoly arises when a few influential It refers to how quantity demanded or supplied producers dominate a market, with a duopoly being responds to changes in price. If a slight price change the minimum form. These producers have substantial results in a substantial shift in quantity demanded, it knowledge about competitors’ actions and can predict indicates high elasticity. Conversely, if a price change responses to strategy changes. Oligopolistic markets has minimal impact on the quantity demanded, the often feature complex product differentiation, entry demand is considered highly inelastic. Producers rely on barriers, and significant price influence by a few large this concept to predict the effects of pricing strategies, producers. while government finance departments use it to model z Monopolistic Competition: Monopolistic compe- tax implications. tition involves many producers using product differentiation to distinguish themselves. Despite z The price elasticity of demand is calculated by similar products, perceived differences allow short- dividing the change in quantity demanded by term monopolistic behavior. Consumer awareness the change in price. Similarly, the price elasticity of product distinctions is essential, and barriers to of supply is determined by dividing the change in entry or exit are typically lower than in oligopolistic quantity supplied by the change in price. Elasticity of markets. demand occurs when a price increase leads to reduced total revenue, while inelasticity results in increased MARKET INTERVENTION IN CAPITALIST total revenue. Unitary elasticity occurs when a change in price causes no change in total revenue. SYSTEMS In capitalist systems, the principle of allowing markets Elasticity of Demand to operate freely is generally favored. However, there is a z Perfectly Elastic Demand: Infinite change in quantity recognition that certain goods and services, termed ‘public demanded for a very small change in price. goods and services,’ require intervention for adequate z Perfectly Inelastic Demand: No change in quantity provision. This intervention, often led by governments demanded regardless of price changes. or supra-national organizations, involves setting prices z Relatively Elastic Demand: Large change in quantity either above or below the equilibrium price. demanded for a small change in price. z Maximum Price Intervention (Safeguarding z Unitary Elastic Demand: Proportional change in Consumers): The imposition of a maximum price quantity demanded equals the change in price. aims to protect consumers. This results in a situation where the quantity demanded surpasses the quantity z Relatively Inelastic Demand: Small change in supplied, provided the maximum price is set below quantity demanded for a large change in price. the equilibrium price. Historical examples, such as the UK government’s intervention during World War-II, Elasticity of Supply highlight the potential consequences, including excess z Relatively Elastic Supply: More than proportional demand and the emergence of illegal markets. change in quantity supplied due to price change. z Minimum Price Intervention (Protecting Produ- z Unitary Elastic Supply: Proportional change in cers): Conversely, a minimum price is sometimes quantity supplied equals the change in price. Basics of Microeconomics 3 z Relatively Inelastic Supply: Less than proportional z Substitution Effect: The change in consumption change in quantity supplied due to price change. resulting from a change in the price of a good, making z Perfectly Elastic Supply: Infinite change in quantity consumers substitute away from higher-priced goods supplied for a very small change in price. to lower-priced ones. z Perfectly Inelastic Supply: No change in quantity z Income Effect: The change in consumption resulting supplied regardless of price changes. from a change in real income. During the COVID-19 pandemic, the price of masks went z Marginal Cost: The cost of producing one additional up because a lot of people needed them, and companies unit of a good. made more masks to meet the demand illustrating elastic z Diminishing Marginal Returns: A principle stating supply. However, we couldn’t suddenly have more doctors, that as investment in a particular area increases the so the number of doctors didn’t increase much. This is an rate of profit from that investment, after a certain example of relatively inelastic supply. point, cannot continue to increase if other variables remain constant. In Addition to Price Elasticity, there are z Price: The amount of money required to purchase a other Relevant Concepts good or service. z Income Elasticity: Measures how quantity demanded z Cost: The expenses incurred in producing or acquiring or supplied responds to changes in income. a good. z Cross Elasticity: Examines how the quantity z Income: Monetary or other returns, earned or demanded or supplied of one good responds to unearned, accruing over a period. changes in the price of another good. z Goods and Services: Tangible products (goods) and activities performed by service providers (services). SOME BASIC TERMS AND CONCEPTS z Final Good: A product that has completed its z Marginal Utility: The additional satisfaction gained production and transformation process. from consuming an additional unit of a good or service. z Consumption Good: Goods and services consumed z Opportunity Cost: The cost of foregone alternatives upon purchase. when one option is chosen over another. z Capital Good: Assets used in production that do not z Market Equilibrium: A situation in which market undergo a transformation in the process. supply and demand balance each other, resulting in z Fixed Asset: Business assets used for more than one stable prices. accounting year. z Externalities: Costs or benefits that affect a party z Depreciation: Decline in value of fixed assets over who did not choose to incur that cost or benefit. time due to use or obsolescence. v v v 4 Basics of Microeconomics  2 Basics of Macroeconomics ECONOMIC PLAYERS Stocks and Flows z Firms: Private entrepreneurs or firms play a key role z Stocks are assets or goods existing at a specific in capitalist economies. They hire wage labor, use point in time, while flows represent quantities over capital and land, and produce goods and services for a period. profit. z Capital goods, such as machinery, are stocks, while z Government: The state enforces laws, provides changes in capital goods over time are flows. public infrastructure, runs schools, and delivers Gross Investment public services. It may also undertake production and taxation. z Gross investment encompasses capital goods and infrastructure like machinery, buildings, roads, and z Household Sector: Households consist of individuals bridges within an economy’s final output, indicating or groups that make consumption decisions, save, and its commitment to future development. pay taxes. They earn income through work (wages, salaries, or profits). Depreciation and Net Investment z Depreciation is an annual allowance for the wear and SOME BASIC CONCEPTS OF tear of capital goods over their useful life. MACROECONOMICS z Net investment measures the new additions to the capital stock, accounting for depreciation. Final Goods z Final goods are products meant for ultimate Consumption vs. Investment consumption and do not undergo further z Economies face a trade-off between producing transformation in the economic process. Example - consumer goods and capital goods. food, tea leaves, clothing, etc. z Increased production of capital goods can lead to z Final goods can be divided into consumption goods higher future production capacity and, ultimately, (goods consumed directly) and capital goods (durable more consumer goods. goods used in production). Interconnectedness of Production and Intermediate Goods Consumption z Intermediate goods are products used by producers z The production process generates factor payments, as inputs in the production of other commodities. which create purchasing power for consumers. z They are not considered final goods and do not enter z Capital goods play a role in this cycle by facilitating the consumption stream directly. production and generating incomes. z Examples are steel sheets used for making automobiles and copper used for making utensils. Circular Flow of Income in the Economy z The description of the economy provides a simplified The Role of Money model without government intervention, external z Money is used as a common measuring rod to quantify trade, or savings. the total value of final goods and services produced z In this model, households receive income from firms in an economy. for their productive activities, and there are four types z Money allows for the aggregation of the monetary of contributions: labor (wage), capital (interest), value of different goods and services, providing a entrepreneurship (profit), and natural resources quantitative measure of final output. (rent). z Households spend their entire income on goods and z The income method calculates aggregate income services produced by domestic firms, and there are by summing up all factor payments (wages, interest, no taxes or imports. profit, rent). GDP by three Methods The Product or Value Added Method z The product method is used to calculate the aggregate annual value of goods and services produced in an economy. It involves summing up the value added by all the firms in the economy. Circular flow of income in a Simple Economy z Example: The example involves two types of producers - wheat producers (farmers) and bread METHODS OF CALCULATING NATIONAL makers (bakers). In a year, farmers produce wheat INCOME with a total value of Rs 100, out of which they sell Rs 50 worth of wheat to bakers. The bakers use this wheat to produce bread with a value of Rs 200. Measurement of Aggregate Income z Aggregate income can be measured through three Value Added methods: expenditure method, product method, z The term that is used to denote the net contribution and income method. made by a firm is called its value added. z The expenditure method calculates aggregate z Value added by a firm is calculated as the value of income by measuring the spending firms receive for production minus the value of intermediate goods used. For the farmers, their value added is Rs 100 final goods and services produced. (the entire value of their wheat production). For the z The product method measures aggregate income bakers, their value added is Rs 200 (bread production) by calculating the aggregate value of final goods and minus Rs 50 (the value of wheat they bought from the services produced by all firms. farmers), which equals Rs 150. Farmer Baker Total production 100 200 Intermediate goods used 0 50 Value added 100 200-50=150 Production, Immediate Goods and Value Added Gross Value Added and Net Value Added z Unlike gross value added, net value added does not z If we include depreciation in value added then the include wear and tear that capital has undergone. measure of value added that we obtain is called Gross z For example, let us say a firm produces Rs 100 worth Value Added. of goods per year, Rs 20 is the value of intermediate z If we deduct the value of depreciation from gross goods used by it during the year and Rs 10 is the value value added we obtain Net Value Added. of capital consumption. The gross value added of the 6 Basics of Macroeconomics  firm will be Rs 100 – Rs 20 = Rs 80 per year. The net example). Such an estimate is called Gross Domestic value added will be, Rs 100 – Rs 20 – Rs 10 = Rs 70 Product (GDP). per year. Thus GDP ≡ Is the total gross value added of all the firms in the economy. Inventory z Inventory in economics refers to the stock of unsold Expenditure Method finished or raw goods a firm holds from one year An alternative approach to calculating GDP is through to the next, with changes indicating accumulation the expenditure method, which focuses on the demand (increase) or decumulation (decrease) in value over side of products. For Example - The Rs 50 worth of wheat time. It’s a crucial variable for assessing a company’s that the bakers buy from the farmers counts as intermediate production and sales dynamics. goods, hence it does not fall under the category of final z The change of inventories of a firm during a year expenditure. Therefore the aggregate value of output of ≡ production of the firm during the year – sale of the economy is Rs 200 (final expenditure received by the the firm during the year. baker) + Rs 50 (final expenditure received by the farmer) z For example, let us suppose that a firm had an unsold = Rs 250 per year. stock worth Rs 100 at the beginning of a year. During In the example of the farmer-baker economy described the year it had produced Rs 1,000 worth of goods and earlier, the aggregate value of the output in the economy managed to sell Rs 800 worth of goods. Therefore, Rs using the expenditure method is determined as follows: 200 is the difference between production and sales. z Calculate the final expenditures made by each This Rs 200 worth of goods is the change in inventories. firm. Final expenditure refers to spending, not for This will add to the Rs 100 worth of inventories the intermediate purposes. firm started with. Hence the inventories at the end of z Sum up the revenues earned by each firm from the year is, Rs 100 + Rs 200 = Rs 300. final consumption (C), investment (I), government z Notice that change in inventories takes place over a spending (G), and exports (X). period of time. Therefore it is a flow variable. z For the entire economy, calculate the aggregate z Inventories are treated as capital and addition to the final consumption expenditure (C), which includes stock of capital of a firm is known as investment. spending on domestic firms but excludes spending Therefore, a change in the inventory of a firm is on imported consumption goods (Cm). treated as an investment. z Calculate the aggregate final investment expenditure z Three major categories of investment are as (I), which includes spending on domestic firms but follows: excludes spending on foreign investment goods (Im).  Inventory Investment: This involves the increase z Determine the aggregate final government expenditure in the value of a firm’s inventories over a year, (G) for the economy, which includes spending on considered as an investment expenditure made domestic firms but excludes spending on imports by the firm. (Gm).  Fixed Business Investment: It comprises z Calculate the aggregate exports (X) received by the investments in machinery, factory buildings, and economy from foreign buyers. equipment by firms to enhance their production z Subtract the aggregate imports expenditure (M), capabilities. which includes spending on imports of consumption  Residential Investment: This category relates goods (Cm), imports of investment goods (Im), and to investments made in housing facilities, such government spending on imports (Gm). as construction and improvement of residential z Express GDP using the expenditure method as GDP = properties. C + I + G + X - M. z Change in inventories can be planned or unplanned. This equation provides a way to calculate GDP based Unplanned accumulation of inventories occurs on final expenditures on consumption, investment, when sales fall unexpectedly, resulting in unsold government spending, exports, and imports. It is worth goods beyond expectations. Conversely, unplanned noting that investment expenditure (I) is often the most decumulation of inventories happens when there’s variable component in this calculation. an unexpected increase in sales, reducing inventories more than anticipated. Income Method Note - If we sum the gross value added of all the firms The income method of calculating GDP focuses on the of the economy in a year, we get a measure of the value incomes received by all the factors of production, such of the aggregate amount of goods and services produced as labor, capital, entrepreneurship, and land. It establishes by the economy in a year (just as in the wheat-bread a relationship between the sum of final expenditures in Basics of Macroeconomics 7 the economy and the incomes earned by households and Market Prices factors of production. Market prices represent the final prices of goods and Here’s how the income method is applied: services that consumers pay. To calculate market prices, z Consider there are M households in the economy, and one needs to add product taxes (like excise tax, service let Wi represent the wages and salaries received by tax, export and import duties) and subtract product subsidies from basic prices. the i-th household, Pi for gross profits, Ini for interest payments, and Ri for rents in a specific year. z GDP is calculated as the sum of these various income FACTOR COST, BASIC PRICES, AND components: GDP = Σ(Wi) + Σ(Pi) + Σ(Ini) + Σ(Ri). MARKET PRICES (The symbol Σ is a notation – it is used to denote z The Central Statistics Office (CSO) of the Government summation.) of India has been reporting the GDP at factor cost z The total income earned by all households is expressed and at market prices. In its revision in January 2015 as GDP. the CSO replaced GDP at factor cost with the GVA at z This method essentially states that the revenues basic prices, and the GDP at market prices, which is earned by all firms in the economy should be now called only GDP, is now the most highlighted distributed among the factors of production such as salaries, wages, profits, interest earnings, and rents. measure. When considering the income method along with the z The measurement of national income in India involves value-added method and expenditure method, they all various concepts such as GDP at factor cost, GDP at provide different expressions of the same GDP variable. market prices, GVA at basic prices, and the distinction These methods represent the relationship between between production taxes and product taxes, as well production, expenditure, and income. as subsidies. This is a measure that focuses on the value of total output produced in the economy, considering only the payment to factors of production (like wages, rent, interest, and GDP at Factor Cost profits) and excluding any taxes. In India, GDP at factor cost was widely used as a measure of national income. GVA (Gross Value Added) at basic prices is a concept that considers the value of total output produced in the economy minus the value of intermediate consumption (goods GVA at Basic Prices used in further production, not for final consumption). It includes net production taxes (production taxes minus production subsidies). The relationships among these concepts are as follows: GVA at factor cost + Net production taxes = GVA at basic prices GVA at basic prices + Net product taxes = GDP at market prices In recent years, the Central Statistics Office (CSO) of the z Gross National Product (GNP): GNP represents the Government of India has shifted its focus from GDP at total economic output produced within a country, factor cost to GVA at basic prices as a key measure of including income earned by domestic factors of national income. This change highlights the importance production abroad minus income earned by foreign of understanding the distinction between various taxes factors of production within the country. It is calculated and subsidies related to production and products in as GDP plus net factor income from abroad. calculating national income. GNP = GDP + Net Factor Income from Abroad z Net National Product (NNP): NNP is obtained by SOME MACROECONOMIC IDENTITIES subtracting depreciation (wear and tear of capital) There are various macroeconomic identities and concepts from GNP. Depreciation does not contribute to related to national income measurement, including anyone’s income, so it is deducted to obtain a more Gross National Product (GNP), Net National Product accurate measure of income. (NNP), National Income (NI), Personal Income (PI), and NNP = GNP - Depreciation Personal Disposable Income (PDI). These identities help z National Income (NI): NI is NNP evaluated at in understanding how income is distributed within an market prices, taking into account indirect taxes and economy and how it is affected by various factors like subsidies. It represents the income that accrues to depreciation, taxes, subsidies, and transfers. factors of production within the country. 8 Basics of Macroeconomics  NI = NNP at Market Prices - Net Indirect Taxes (Indirect Taxes - Subsidies) Note All these variables are evaluated at market prices. We get the value of NNP evaluated at market prices. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate the part of NNP that actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices. The measure that we obtain by doing so is called Net National Product at factor cost or National Income. z Personal Income (PI): PI is the income received by households from NI. It is calculated by deducting undistributed profits, corporate tax, and net interest payments made by households, and adding transfer payments received from the government and firms. National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world The idea behind National Disposable Income is that it gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal. Current transfers from the rest of the world include items such as gifts, aids, etc. Private Income = Factor income from net domestic product accruing to the private sector + National debt interest + Net factor income from abroad + Current transfers from government + Other net transfers from the rest of the world.  NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP).  The households receive transfer payments from the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households. PI = NI - Undistributed Profits - Net Interest Payments Made by Households - Corporate Tax + Transfer Payments to Households z Personal Disposable Income (PDI): PDI is the income available to households after deducting personal tax payments (such as income tax) and non-tax payments (like fines) from PI. It represents the income that households have at their disposal for consumption or savings. PDI = PI - Personal Tax Payments - Non-Tax Payments Diagrammatic representation of the relations between these major macroeconomic variables z Nominal GDP units of bread, price was Rs 10 per bread. GDP  Nominal GDP is the total value of goods and at current price was Rs 1,000. In 2001 the same services produced in an economy at current country produced 110 units of bread at price Rs 15 market prices. It does not account for changes per bread. Therefore nominal GDP in 2001 was Rs in prices over time. 1,650 (=110 × Rs 15). Real GDP in 2001 calculated  For example, suppose a country only produces at the price of the year 2000 (2000 will be called bread. In the year 2000 it had produced 100 the base year) will be 110 × Rs 10 = Rs 1,100. Basics of Macroeconomics 9 z Real GDP Income Distribution  Real GDP is a measure of economic output that z GDP measures the total economic output of a country, adjusts for changes in prices. It evaluates goods but it does not provide information about how that and services at constant (base-year) prices, allowing for a comparison of production volumes output is distributed among its citizens. across different years. z If GDP increases, but the gains are concentrated in the  Real GDP helps eliminate the impact of price hands of a few individuals or entities, the majority of changes, making it a useful tool for assessing the population may not experience improved welfare. actual changes in economic production. Unequal income distribution can lead to disparities Real GDP = (Nominal GDP / GDP Deflator) * 100 in well-being. z GDP Deflator  The GDP deflator is an index that measures Non-Monetary Exchanges the average change in prices of all goods and z Many valuable activities in an economy are not services included in GDP over time. A GDP monetized or included in GDP calculations. deflator of 150% implies that prices have increased z For instance, domestic work performed at home, by 50% compared to the base year. volunteer activities, and barter exchanges (where  It is calculated as the ratio of nominal GDP to goods and services are directly swapped without real GDP, expressed as a percentage. money) are not typically accounted for in GDP. This GDP Deflator = (Nominal GDP / Real GDP) * 100 omission can result in an underestimation of economic z Consumer Price Index (CPI): The CPI measures activity and well-being. changes in the prices of a fixed basket of goods and services typically purchased by a representative Externalities consumer. It quantifies the inflation experienced by consumers. CPI is expressed as a percentage change z GDP does not consider externalities, which are in prices from a base year. unintended side effects of economic activities, which CPI = (Cost of Basket in Current Year / Cost of can be positive or negative. Basket in Base Year) * 100 z For example, a factory may contribute to GDP growth, z Wholesale Price Index (WPI): The WPI is an index but if it also pollutes a nearby river, causing harm to that tracks changes in the prices of goods at the local communities and ecosystems, this harm is not wholesale level. It is used to assess inflation in the reflected in GDP. Conversely, positive externalities, early stages of production and distribution. In some such as education and research, may enhance well- countries, it may be referred to as the Producer Price being but are not directly captured by GDP. Index (PPI). Here, notice that CPI may differ from the GDP deflator because: CONCLUSION  The goods purchased by consumers do not represent all the goods which are produced in Macroeconomics focuses on the study of aggregate a country whereas the GDP deflator takes into economic variables and the interrelationships among account all such goods and services. different sectors of an economy. It emerged in response  CPI includes prices of goods consumed by the to the Great Depression of the 1930s, with John Maynard representative consumer, hence it includes prices Keynes playing a significant role in its development. of imported goods but the GDP deflator does not include prices of imported goods. Macroeconomics views an economy as consisting of households, firms, government, and the external sector,  The weights are constant in CPI – but they differ according to the production level of each good in all interacting in a circular flow. Methods for calculating the GDP deflator. aggregate income, including income, product, and expenditure approaches, have been discussed, along with GDP AND WELFARE various economic indicators like GDP, GNP, and price Using Gross Domestic Product (GDP) as a sole indicator indices. However, it is essential to recognize that GDP of the welfare of a country’s people has its limitations, alone may not accurately represent the overall welfare of and there are several reasons why GDP may not accurately a country, considering factors such as income distribution reflect the overall well-being of a nation: and externalities. 10 Basics of Macroeconomics Basic National Income Aggregates GDP is the market value of all final goods and services produced within a domestic territory of a country measured in a year. Gross Domestic All production done by the national residents or the non-residents in a country gets 1 Product at Market included, regardless of whether that production is owned by a local company or a Prices (GDPMP) foreign entity. Everything is valued at market prices. GDPMP = C + I + G + X - M GDP at factor cost is gross domestic product at market prices, less net product taxes. Market prices are the prices as paid by the consumers Market prices also include product taxes and subsidies. The term factor cost refers to the prices of products GDP at Factor Cost 2 as received by the producers. Thus, factor cost is equal to market prices, minus net (GDPFC) indirect taxes. GDP at factor cost measures the money value of output produced by the firms within the domestic boundaries of a country in a year. GDPFC = GDPMP - NIT This measure allows policy-makers to estimate how much the country has to spend Net Domestic just to maintain their current GDP. If the country is not able to replace the capital 3 Product at Market stock lost through depreciation, then GDP will fall. Prices (NDPMP) NDPMP = GDPMP - Dep NDP at factor cost is the income earned by the factors in the form of wages, profits, NDP at Factor Cost 4 rent, interest, etc., within the domestic territory of a country. (NDPFC) NDPFC = NDPMP - Net Product Taxes - Net Production Taxes GNPMP is the value of all the final goods and services that are produced by the normal residents of India and is measured at the market prices, in a year. Gross National GNP refers to all the economic output produced by a nation’s normal residents, 5 Product at Market whether they are located within the national boundary or abroad. Prices (GNPMP) Everything is valued at the market prices. GNPMP = GDPMP + NFIA GNP at factor cost measures the value of output received by the factors of production GNP at Factor Cost 6 belonging to a country in a year. (GNPFC) GNPFC = GNPMP - Net Product Taxes - Net Production Taxes This is a measure of how much a country can consume in a given period of time. NNP Net National Product measures output regardless of where that production has taken place (in domestic 7 at Market Prices territory or abroad). (NNPMP) NNPMP = GNPMP - Depreciation NNPMP = NDPMP + NFIA NNP at factor cost is the sum of income earned by all factors in the production in the NNP at Factor Cost form of wages, profits, rent and interest, etc., belonging to a country during a year. (NNPFC) 8 It is the National Product and is not bound by production in the national boundaries. Or It is the net domestic factor income added with the net factor income from abroad. National Income (NI) NI = NNPMP - Net Product Taxes - Net Production Taxes = NDPFC + NFIA = NPFC 9 GVA at Market Prices GDP at market prices 10 GVA at basic prices GVAMP - Net Product Taxes 11 GVA at factor cost GVA at basic prices - Net Production Taxes v v v Basics of Macroeconomics 11  3 Money and Banking Double coincidence of wants: Both parties have to Accounts maintained by NRI/PIO agree to sell and buy each other’s commodities. z Foreign Currency Non-Resident (FCNR) Account: In a barter system where goods are directly exchanged Account can be held in any freely convertible foreign without the use of money, double coincidence of wants currency, exclusively as term deposits. Both the is an essential feature interest and principal are non-taxable and can be freely repatriated. FUNCTIONS OF MONEY z Non-Resident External (NRE) Account: Available z Money as a Medium of Exchange: Money serves as in Indian Rupees, this account can take the form of an intermediate step in an economy, eliminating the Current, Savings, Recurring, or Fixed Deposit.The need for a double coincidence of wants. interest and principal are non-taxable and can be freely repatriated. z Convenient Unit of Account z Non-Resident Ordinary (NRO) Account: z Universal Acceptability Maintained in Indian Rupees, this account offers z Store of Value flexibility as Current, Savings, Recurring, or Fixed z Dynamic in Nature: When commodity prices Deposit. While the principal and interest are taxable, increase in terms of money, the purchasing power repatriation is restricted. of money decreases, allowing a unit of money to Cheque: Paper instructing the bank to pay a specific purchase less of any commodity. amount from the person’s account to the person in whose z Cashless nature: Eg: Jan Dhan accounts, Aadhar- name the cheque has been issued. Cheques drawn on enabled payment systems, e-wallets, and National savings or current accounts can be refused by anyone, Financial Switch to promote financial inclusion. making demand deposits not legal tenders. Cryptocurrency: A digital or virtual form of currency MODERN FORMS OF MONEY that uses cryptography for security and operates on a decentralized network typically based on blockchain Currency technology. Notable examples include Bitcoin, Litecoin, z Currency: paper notes and coins. It is accepted Monero, Dogecoin, and Bitcoin Cash. as a medium of exchange because the currency is Dinesh Sharma Committee recommended a total ban on authorized by the government of the country. cryptocurrencies. Currency notes and coins are therefore called fiat money. They do not have intrinsic value; Also called z Bitcoin is not tied to a bank or government and legal tenders as they cannot be refused by any allows users to spend money anonymously. citizen of the country for settlement of any kind of z Anyone with a Bitcoin address can send and receive transaction. [UPSC 2018] Bitcoins from anyone else with a Bitcoin address. z The Government of India issues coins and notes z Online payments can be sent without either side of Rupee one. The Reserve Bank of India issues knowing the identity of the other. [UPSC 2016] currency notes (except rupee one note) on behalf of Non-fungible token (NFT): Serves as a distinct the central government. cryptographic asset designed to establish and verify Money as Deposits with Banks ownership of digital assets. z Demand deposit: deposits in the bank accounts can Central Bank Digital Currency: A digital form of a be withdrawn on demand. country’s official currency, issued and controlled by its central bank. It’s essentially like cash but in digital form. z Term deposit or fixed deposit: deposits can be withdrawn after a stipulated time period otherwise E-rupee: A digital form of legal tender issued by the one has to pay a penalty. Reserve Bank of India (RBI) that can be exchanged with traditional fiat currency; Types: Retail E-rupee for general CENTRAL BANK use and Wholesale CBDC for select financial institutions. z The Reserve Bank of India was established in 1935. z Functions of RBI DEMAND AND SUPPLY OF MONEY  Issuing of the currency; controlling the money supply through methods like bank rates and Demand for Money reserve ratios; Total demand for money in an economy is composed  Banker to the government.  Banker of banks (Other banks retain their of Transaction Demand: The amount of money required deposits with the RBI; The RBI lends funds to for current transactions of companies and individuals and the commercial banks in times of need; The Speculative Demand: The desire to have money for the RBI advises the commercial banks on monetary purpose of investing in assets. The former is directly matters) [UPSC 2012] proportional to real GDP and price level, whereas the  Lender of last resort (RBI offers loans to banks latter is inversely related to the market rate of interest. or other eligible institutions that are experiencing financial difficulty or are considered highly risky [UPSC 2013] or near collapse) [UPSC 2021] z If the supply of money in the economy increases  Custodians of foreign exchange reserves. and people purchase bonds with this extra money, z Governor of RBI demand for bonds will go up, bond prices will rise  Appointed after the proposal made by the and the rate of interest will decline. Financial Sector Regulatory Appointments Search  When the interest rate comes down, more and Committee (FSRASC), headed by the Cabinet more people expect it to rise in the future Secretary. and anticipate capital loss. Thus they convert  According to Section 8 (4) of the RBI Act, the their bonds into money giving rise to a high Governor and Deputy Governors shall hold office speculative demand for money. for such term not exceeding 3 years as the Central  When the interest rate is very high, everyone Government may fix when appointing them. expects it to fall in future and hence anticipates  They are eligible for re-appointment. capital gains from bond-holding. Hence  The Governor of the RBI draws his power from the people convert their money into bonds. Thus, RBI Act 1934[UPSC 2021] speculative demand for money is low.  The RBI Act does not provide for any specific z Velocity of circulation of money: The number of qualification for the governor. times a unit of money changes hands during the  The governor can be removed by the central unit period. government. z Liquidity Trap: Occurs when interest rates are  According to Section 7 of RBI ACT 1934, The very low, yet consumers prefer to hoard cash rather than spend or invest their money in higher- Central Government may from time to time yielding bonds or other investments. give such directions to the Bank as it may, after consultation with the Governor of the Bank, z Aggregate Money Supply= total currency with consider it necessary in the public interest. There the public + demand deposits of the public with is no such provision in the constitution of India. banks. When you withdraw Rs. 1,00,000 from the [UPSC 2021] bank, it goes to the currency in hand from demand deposits in banks but it does not change the value z Minimum Reserve System of RBI: With a minimum of the money supply. [UPSC 2020] value of government-held gold of ₹200 crores (₹115 cr rupee should be in the form of Gold or gold bullion and z Interest Coverage Ratio is a debt and profitability rest ₹85 cr should be in the form of foreign currencies) ratio used to determine how easily a company can and the remaining is backed by the government pay interest on its outstanding debt. [UPSC 2020] securities issued and held by RBI. Publications of RBI Supply of Money z  Report on Trend and Progress of Banking in India- Money in a modern economy includes cash and bank Annually deposits. These are created by the central bank and  Financial stability report- Half yearly commercial banking system. Let’s have a look at them  Monetary policy report- Half yearly in detail.  Report on foreign exchange reserves- Half yearly Money and Banking 13   Bi-monthly Policy Statement DEPOSIT INSURANCE AND CREDIT  Industrial Outlook Survey of the Manufacturing GUARANTEE CORPORATION Sector (Quarterly) Established under the DICGC Act 1961, is one of the  Consumer Confidence Survey (Quarterly) wholly owned subsidiaries of the RBI.  Report on Financial Review z DICGC insures all bank deposits, such as savings, fixed z Various Committee Recommendations current, and recurring deposits for up to the limit of  Usha Thorat Committee (2004) : RBI should Rs 500,000 for each depositor in a bank. (If one has maintain 18% of its total assets as reserves. multiple accounts in a single bank, one will be given a maximum of Rs 500000 only in case of bank failure).  Malegam Committee (2014) : Should transfer all entire net profits annually to RBI z The bank (not the customer) pays the premium amount for insurance.  Bimal Jalan Committee (2019): The Committee z It is mandatory to take deposit insurance cover from has stated that the surplus distribution policy must DICGC by the following entities take into the account the total realized equity. Only  All Scheduled Commercial Banks if realized equity is above its requirement (6.5 per  Local Area Banks cent to 5.5 per cent), the entire net income should  Foreign banks with branches in India be transferable to the Government.  Cooperative Banks. z The central bank’s currency, known as high-powered money or reserve money, serves as a basis for credit z No insurance cover is provided for the following:  Deposits of Foreign Governments. creation.  Deposits of Central/State Governments. Money supply is a stock variable that represents the  Inter-bank deposits. total amount of money in circulation among the public  Any amount due on account of any deposit received at a specific time. outside India. z M1= currency (notes plus coins) held by the public  Deposits of the State Land Development Banks + ‘net’ demand deposits held by commercial banks. with the State co-operative banks. ‘net’ implies that only deposits of the public held by the banks are to be included in the money supply. The  Any amount that the corporation has specifically interbank deposits, which a commercial bank holds in excluded with the RBI’s prior approval. other commercial banks, are not to be regarded as part of the money supply. COMMERCIAL BANKS z M2= M1 + Savings deposits with Post Office savings Governed under Banking Regulations Act, 1949. banks Commercial Banks can be categorized into two segments: z M3= M1 + Net time deposits of commercial banks Scheduled Commercial Banks (SCBs) and Non- z M4 =M3+Total deposits with Post Office savings Scheduled Commercial Banks. organizations (excluding National Savings z Scheduled Commercial Banks are officially listed in Certificates) the Second Schedule of the RBI Act, 1934 and fall z M1 and M2 are known as narrow money. M3 and under the regulatory framework of the Banking M4 are known as broad money. Regulation Act, 1949. z M1 is the most liquid and easiest for transactions z Two primary factors determine an SCB’s status: A whereas M4 is the least liquid of all. M3 is the minimum paid-up capital and reserves of 5 lakh, most commonly used measure of money supply. ensuring the bank’s resilience and ability to manage It is also known as aggregate monetary resources. deposits responsibly and Maintaining operations z Currency issued by the central bank can be held that prioritize the welfare of depositors, as by the public or by the commercial banks, and determined by the Reserve Bank of India (RBI). is called the ‘high-powered money’ or ‘reserve money’ or ‘monetary base’ as it acts as a basis for z SCBs in India are categorized into five different groups credit creation. as follows: z Sequence of these assets in the decreasing order  State Bank of India of liquidity: Currency > Demand deposits with the  Nationalized Banks banks > Savings deposits with the banks > Time  Indian Private Banks deposits with the banks [UPSC 2013]  Private Sector Foreign Banks 14 Money and Banking   Regional Rural Banks (RRBs) : Established on  Can provide remittances services as well as credit recommendations of the Narasimham Working cards; Allowed to issue ATM or debit cards. Group (1975), in accordance with the Regional  Can accept NRI deposits. Rural Banks Act of 1976; Ownership: 50% by z Payment Banks: Established on recommendations of the Central Government, 35% by the Sponsor Nachiket Mor Committee; Licensed under Bank, and 15% by the State Government. Banking Regulation Act, 1949 [UPSC 2016]  Minimum paid up capital required is 100 crore COOPERATIVE BANKS and the promoter’s stake should remain at least Co-operative Societies are governed by the Co-operative 40% for the first five years. Societies Act, 1904.  Existing Prepaid Payment Instrument (PPI) Four distinct tiers: issuers or businesses like mobile telephone z Central Cooperative Banks: Operate at the district companies, Microfinance Institutions (MFIs) level, providing loans primarily to affiliated primary and Small Finance Banks (SFBs) can also societies. establish Payments Banks. z State Cooperative Banks: Operate at state level.  Do not provide credit services like loans and z Primary Cooperative Banks: Serve urban and semi- credit cards; Provide both current accounts and urban areas, focusing on non-agricultural businesses. savings accounts; Allowed to issue ATM /debit z Land Development Banks:Cater specifically to farmers’ cards. needs, offering credit for development purposes.  They accept demand deposits (Only up to Comprise three tiers: Primary, State, and Central. 2 lakh per individual customer) but cannot  Recently came under the regulatory purview accept time deposits and Non-Resident Indian of the National Bank for Agricultural and Rural (NRI) deposits. Development (NABARD) instead of just RBI and  Can distribute products like mutual funds, state governments. insurance, third party loans. z Urban Cooperative banks: After Banking Regulation  Can apply for conversion into small finance (Amendment) Act 2020 was passed, all the powers were transferred to RBI from the Registrars of the banks (SFBs) after five years of operation. cooperative societies. Even some powers are left with  FDI is allowed in payment banks.They cannot set the registrar but RBI powers will override them. up subsidiaries to undertake non-banking activities. RBI allows cooperative banks to raise funds through the issuance of equity shares, preference shares and debt DEVELOPMENT BANKS instruments; Large cooperative banks with paid-up Financial entities that cater to the economy’s needs by share capital and reserves of Rs.1 lakh were brought under the purview of the Banking Regulation Act 1949 providing long-term financial assistance, especially to with effect from 1st March 1966. [UPSC 2021] sectors crucial for economic growth and infrastructure development. DIFFERENTIATED BANKS z NABARD: Born in 1982 following the recommendations of the B. Sivaraman Committee; Concept of differentiated banking was introduced in fully owned entity of the Government of India. 2013 following recommendations from the Nachiket Mor Committee; Cater to specific customer segments. z Small Industries Development Bank of India (SIDBI): Established in 1990; owned by Government