Macro-Economics Archives - BBA|mantra

Taxation – Introduction, Characteristics, Objectives, Kinds, Types

bbamantra — Mon, 07 Aug 2017 11:57:18 +0000

Taxation refers to the act of levying taxes on the citizens of a country through a well-defined tax structure developed by the government of the country.

A Tax is a compulsory payment made by the citizens of a country to the government to meet expenditures of public authorities and for the common welfare of all, without any expectations of any specified and special returns from the Government.

According to Seligman – “A tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred.”

Characteristics of Tax

It is a compulsory contribution, a person cannot evade tax but refrain from paying it by not consuming a taxed product or service.
It is spent on public welfare activities – generally non-tax payers are benefitted more from it than tax payers.
It does not provide a specific benefit – According to Pigoo – “The essence of tax is the absence of a direct quid-pro-quo between the tax payers and public authorities.”
It is the duty of a citizen to pay tax.
It is not a cost for a service.
The assessment and realization of tax depends upon the constitutional authority.

Objectives of Tax

To raise revenue for welfare activities and economic development
To regulate the economy
To reduce inequality in distribution of income
To maintain the National Income and control inflation

Canons of Tax | Canons of Taxation

Characteristics of a good tax system

It must be Equitable i.e. the burden of taxation should be minimum. It must be distributed between different sections of the society in a just and equitable manner and in such a way that the burden of tax lies more on the rich and less on the poor.
It must be elastic i.e. Proper blend of direct and indirect taxes. By blending a variety of direct and indirect taxes together efforts must be made to reduce the scope for tax evasion to the minimum.
The government must keep in mind the convenience of the tax payer while devising a tax system.
Certain sources of income must be reserved for situations like war, floods, natural disasters etc.
It must follow the objectives of maximum social advantage.
It must include all the canons of tax.
It must be productive.

Kinds of Tax | Types of Taxes

According to Bustle, “ Taxes which are levied on permanent and recurring occasions are direct taxes. Taxes which are charged on occasional or particular events are indirect taxes.”

According to Dalton, “A direct tax is really paid by the person on whom it is partially or wholly imposed, while an indirect tax is imposed on one, but paid partially or wholly by another owing to a consequential change in terms of some contract or bargain between them.”

Direct Tax – It is a tax, the burden of which is directly borne by the person on whom it is levied. Thus the impact and incidence of tax lies on the person on whom it is levied. E.g Income Tax, Corporate Tax, Tax on Capital gains.

Indirect Tax – In indirect tax, the burden of tax is partially or wholly borne by a person who does not directly pay the tax i.e. one person pays the tax and another bears the burden of tax. In such a case the impact and incidence of tax fall on more than one person. E.g. Sales Tax, Service Tax, VAT, Custom duties and Octroi, Excise duty

Progressive Taxation – In Progressive Taxation an exemption limit is fixed by the government and all individuals falling below that limit are granted exemption from tax payment while the rate of tax increases in a progressive manner for those who lie above the exemption limit.

Proportional Taxation – In Proportional Taxation the income of all tax payers taxed at a uniform rate irrespective of their income level. The tax rate does not change with the change in income of a person.

Regressive Taxation – In Regressive Taxation, the rate of tax decreases with increase in tax payer’s income. It is the opposite of progressive taxation.

Digressive Taxation – It is a mixture of progressive and proportional tax. In this the tax rate is progressive up to a certain limit and then becomes proportional after that limit. Thus the tax rate increases with increase in a person’s income up to a certain limit, thereafter becomes constant.

Specific Tax – It is levied on the basis of number, size or weight of a commodity.

Ad-Valorem Tax – It is levied on the basis of price of commodity.

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Canons of Taxation – Fundamental and Other Canons of Tax

bbamantra — Mon, 07 Aug 2017 10:22:18 +0000

Canons of Taxation are the fundamental principles of taxation which are used to create an effective taxation system in a country. Canons are basically characteristics of a good taxation system. A government must incorporate these canons of taxation when developing a tax structure & system in order to make the same more efficient and effective.

Fundamental Canons of Taxation

The four fundamental canons of taxation were propounded by Adam Smith in 1776. They were:

Canon of Equity – Every person must pay taxes in proportion to his income. But modern economists support progressive taxation, i.e. more the income more the tax burden.

Canon of Certainty – It states that the tax that is to be paid by a person must be certain and not arbitrary. The tax payer must know in advance –

How much tax to pay?
When to pay?
In what form to pay? (manner of payment)
How to pay?

Canon of convenience – It states that tax must be levied in such a manner and at such a time that it is convenient to the tax payer as he makes a sacrifice at the time of tax payment.

Canon of Economy – The cost of tax collection should be minimum and the taxes collected must bring maximum revenue to the Government.

Others Canons of Taxation

Canon of Elasticity – Taxes must be elastic in nature i.e. Government must be able to increase or decrease the tax revenue according to the requirements of the country.

Canon of Productivity – A tax must be able to yield sufficient revenue to the government otherwise it will be a unproductive tax. Therefore, few productive taxes are better than imposing many unproductive taxes.

Canon of Variety – A single tax can be easily evaded by a person. Therefore there must be a variety of taxes on people and commodities.

Canon of Simplicity – A tax system must not be complex. It must be simple so that every tax payer can understand it without any special assistance.

Canon of Diversity – It states the principle of multiple taxation (charging various direct and indirect taxes rather than one single tax) so that all sections of the society can be brought under the taxation network. But too much diversity in taxes is undesirable as it increases the cost of tax collection.

Canon of Uniformity – It refers to uniformity in imposition of tax, assessment of tax and realization of tax.

Canon of Expediency or Desirability – A tax must be desirable. A tax payer must be given justification as to why he is paying a particular tax.

Canon of Coordination – It states that tax authorities must be well coordinated.

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Impact of Demonetization on Central Bank (RBI) Autonomy in India

bbamantra — Thu, 15 Jun 2017 11:38:04 +0000

Project/Slides/Presentation Transcript

Topic: Demonetization Impact on Central Bank Autonomy

INDEPENDENCE OF CENTRAL BANKS

Central Bank Autonomy refers to the extent of freedom realised by the central bank in its functioning, independent of executive and legislative control. It implies operational freedom. A central bank is said to be independent or autonomous if it is free from any kind of political pressure or influence in formulation and implementation of monetary policies of a country.

have investigated the relationship between macroeconomic performance and the degree to which central banks are influenced from partisan politics. They Various economists have examined the legal and institutional framework within which central banks in different countries operate, and constructed indexes for the extent to which their central banks are independent known as central bank independence index (CBII). One of the major finding of these economists was that countries with independent central banks did not have higher unemployment, lower real GDP growth, or larger business cycles i.e. more independent central banks ensured lower average inflation and less variable inflation. Hence countries that had an independent central bank(High CBII), such as Germany, Switzerland, and the USA, tended to have low average inflation, while countries that had central banks with less independence(Low CBII), such as New Zealand and Spain, tended to have higher average inflation.

In India, the RBI is a government organisation like any other public sector unit. At present it does not enjoy the power to formulate and conduct an independent monetary policy. This is why control of inflation has become difficult throughout the planning period. The effectiveness of the RBI’s monetary policy is lost due to the present monetary fiscal link and because of an inherent inflation bias due to the short-term time horizon of politicians. Therefore, unless RBI is made an autonomous institution i.e. free from government intervention and control, it will not able to effectively control price and financial stability. The reason being that inflation is a sin, every government denounces it yet every government practices it.

Thus, autonomy in working enables central banks with a long term decision horizon to assert their authority, when facing a government with a short planning horizon.

IS RBI AUTONOMOUS?

RBI does not have complete autonomy, rather a relative freedom. The RBI, as the central bank, in India has the following 3 major functions:
i) Formulation of the monetary policy involving decision on money supply, credit supply and credit cost
ii) Management of the government debt
iii) Management and regulation of the banking sector

The RBI Act States that the Central government can give directions to RBI after consulting the Governor in larger public interest. The motive behind this clause is that RBI comprises of only bureaucrats and technocrats and who are not elected by the people and hence cannot be held accountable.

Therefore, in case of inflation targeting the government provides the target and RBI’s work is to achieve it. However, in this process the operational autonomy as to how to achieve that target lies with RBI. In case of loan disbursal from PSB’s government plays a significant role as it owns the bank and RBI is only a regulator, so government’s interference is justified in this case.

Autonomy of RBI as provided by RBI Act is fundamental and needs to be maintained but this does not mean complete separation of government’s control over RBI as in a democracy the government represents the people.

Autonomy is different from Independence. RBI is autonomous but not Independent as RBI board members are not elected and hence are not responsible to the public for their actions. Executives of the Government are the elected and hence are accountable to people.

The question of RBI autonomy has come up many a times in recent years on doubts about government interference in inflation targeting, policy rate decisions, setting up of a public debt management agency and recently on the issue of demonetization.

It is imperative to note here that RBI is not a sovereign institution but a player in the Indian economic management with the government and its fiscal policy.

SHOULD RBI BE INDEPENDENT?

The political dispensations always tend to have short-term, pro-growth view of the economy rather than long-term financial stability. Also, the governments are prone to use the banking system to push their populist objectives in order to appease the vote bank, even though the action may not be in the good interest of the banking system (examples are loan waivers and calls to restructure loans).

This is perhaps the reason why a clutch of former RBI officials, including Reddy, Manmohan Singh, Bimal Jalan have pitched for the independence in the operations of central bank.

Demonetization Impact on Central Bank Autonomy

On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series on the recommendation of the Reserve Bank of India (RBI). The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism.

Overnight, Rs 15.44 lakh crore or 86 per cent of the currency in circulation was declared illegal. Norms were announced by the Prime Minister on how people could deal with such currency in their possession which was subsequently changed on an almost daily basis.

The government advised RBI to take the call on demonetization and the RBI board obliged the government without losing time. Is this something unprecedented? Does this violate the norms laid down by the RBI Act?

Two sections of the RBI Act deal with this –

Section 26(2) of the Reserve Bank of India Act, 1934 says that on recommendation of the RBI’s central board, the government may, by notification in the Gazette of India, declare that with effect from a date specified in the notification, any series of bank notes of any denomination shall cease to be legal tender.

So, there is nothing illegal about the RBI board recommending withdrawal of Rs1,000 and Rs500 notes from the system.

And, Section 7 of the Act says “the central government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest”.

So, the government’s advice to the RBI on demonetization is in sync with the Act

Demonetization Impact on Central Bank Autonomy

under Section 7 of the Act, the government can “direct” the central bank. However, it could have fought against it—in private as well as in public—as the appearance of autonomy is as important as actual autonomy itself.

This has happened in the past, the former governor Y.V. Reddy fought hard against the government’s plan to create sovereign wealth funds and use of foreign exchange reserves for infrastructure development. The finance ministry went to the extent of reaching out to the board of the central bank, seeking help to convince Reddy but he did not budge an inch from his stance. In the end the governor made the finance ministry accept that RBI should have the last word on foreign investment in a holding company of a large private bank.

CLAIMS OF THREAT TO RBI AUTONOMY – Demonetization Impact on Central Bank Autonomy

It is well known that the government always put pressure on the RBI to push interest rates down to support growth, leading to open conflicts.
The manner in which the former RBI governor Raghuram Rajan took exit and Urjit Patel took ascension to/from the post of RBI governor in September and the subsequent demonetisation announcement by Prime Minister Narendra Modi in November, gives clue of rapid deterioration in the central bank’s independence in discharging its functions and government interferences.
The process of cutting the RBI’s wings began way back during the UPA days, when the Financial Sector Legislative Reforms Committee (FSLRC) had recommended taking away the debt management from the central bank to a separate entity, public debt management agency (PDMA) and creating a super regulator and shifting the power to set interest rates from the governor to a monetary policy committee (MPC). While both the proposals — creation of PDMA and MPC — have been welcomed largely to improve the existing framework and avoid conflict of interest, the plan to create a super regulator has been discarded outright.
The Demonetization Impact on Central Bank Autonomy further weakening the central bank continued during the NDA regime, when the government failed to fill the posts of a number of non-official directors on the board of the RBI (read here) at a time when the central bank was engaged in a credibility fight struggling to manage the massive demonetisation exercise in Asia’s third largest economy.
Former RBI deputy governor, K C Chakrabarty, said that the central bank, in the past, was not keen for demonetisation. “In the past, RBI has been uncomfortable with it, as rough estimates suggest only 6 percent to 8 percent of black money is in cash. And it does not make sense to hurt 90 percent people, especially the poor and underprivileged, for such a small percentage of black money,”
In a Report Mint stated that ‘RBI has been one of the least independent central banks in the world.’
Former FM P Chidambaram said that ‘‘the power offered by Section 7 has never been exercised in the 83 years of the RBI Act and a weakened central bank wouldn’t do any good for any aspiring economy like India, which is somewhat the situation at this stage’’.
While the RBI has not made public the deliberations of the November 8 board meeting, former Finance P. Chidambaram had questioned the sequence of events, suggesting that the short time intervals between the RBI board decision, the Union Cabinet’s meeting and the Prime Minister’s announcement seemed to indicate that the move was well orchestrated. Mr. Chidambaram is reported to have demanded that the central bank ought to share the minutes of the board meeting and let the public know that who were the directors? And who attended it?
Rating agencies like Standard & Poor’s have issued caution on a growing trust deficit in India when RBI’s autonomy is curbed and the global investors and economy watchers are looking at the country with an element of scepticism.
Deputy Governor K.C. Chakrabarty says ‘‘it is unclear in this whole exercise is how much say the country’s central bank had in the policy decision. RBI’s position has always been against demonetisation. That was the consistent view of the Reserve Bank in the past.’’
The RBI should have advised the government on the ground reality about withdrawing 86 per cent of the currency notes in circulation and the logistical issues. Note ban has hurt confidence in the central bank.
RBI insiders and some central bank watchers believe that RBI’s autonomy and its authority are indeed under siege, and that this dilution of powers preceded demonetization. The authority was being challenged due to attempts to create a separate debt management agency and an independent payments regulator. The autonomy is being challenged by the inflation targeting framework.
RBI governor Urjit Patel has been under the scanner as speculations are rife that he is just following orders and have no stand on his own. Former Governors like Dr. Manmohan Singh and Raghuram Rajan, were known to take their stand on which policies they believed in and took their own decisions.
Interestingly, the world order is no different. In many countries all over the world, one can witness a trend, in which there is a tussle between the government and central bank, and where the latter is becoming weaker by the day. After the 2008 economic recession, there has been an increasing trend in bad blood between governments and central banks.

ARGUMENTS AGAINST THE CLAIM – Demonetization Impact on Central Bank Autonomy

Ajay Shah, a professor at the National Institute of Public Finance and Policy, pointed out that Section 7 of the RBI Act empowers the government to give directions to the central bank governor in matters of public interest. According to Shah, the only areas where there is a need to keep the government out are when the regulator is issuing a licence, investigating someone or setting policy rates.
In a reply to Bloomberg, on a right-to-information query, the apex bank said that the decision to withdraw the legal tender character of the Rs 1,000 and Rs 500 notes was taken by the RBI board at 5.30 p.m. on November 8 less than three hours before Modi announced it to the country.
It is illogical to think that an institution like RBI, whose head is appointed by the elected government, not Parliament or by the people, can act completely independent of the ruling political dispensation.
Following the Centre’s decision to implement the recommendations of the committee headed by Dr. Patel, the RBI for the first time in its history, switched to a rule-based approach to monetary policy formulation with an explicit target set for inflation. A Monetary Policy Committee (MPC) has been setup and has started functioning with three representatives each from the government and the RBI, and the veto power with the Governor.
“Introduction of inflation targeting framework and a MPC-based approach, have increased the accountability and transparency of monetary policy making,” said Rupa Rege Nitsure, group chief economist, L&T Finance Holdings, who was a member of the Patel committee. ‘‘It ensures balanced representation of various sections of society and is hence more democratic in essence. The publication of the minutes informs general public about the actual thought processes supporting the decision. This helps create a good feedback mechanism.”
Finance Ministry said in a statement said that “The Government fully respects the independence and autonomy of the Reserve Bank of India.” And that “Consultations mandated by law or as evolved by practice should not be taken as infringement of autonomy of RBI.”
The government’s demonetization move has led to widespread adoption of online payment and is expected to have a positive long term impact on the economy, the report titled ‘India: Transforming through radical reforms’ by Assocham and EY observed that improved governance, favourable conditions to conduct business, transparency in government procedures and responsive policy making with an immediate focus on effective implementation of reforms will continue to evolve India into a preferred destination for foreign investment.

CONCLUSION

In the wake of recent Demonetization Impact on Central Bank Autonomy, the autonomy of the RBI is in question. RBI has 2 main roles in which it acts as an autonomous body free from the interference of the government –

On conducting the monetary policy in accordance with the inflation targets set by the Finance ministry.
Regulating the banking system, in which the government has a separate role as the owner of the public banks.

Due to the Demonetization Impact on Central Bank Autonomy, the autonomy is being questioned because it is being claimed that the government had advised the RBI to endorse the demonetisation and that it was not the other way round. Government directing the RBI on such matters and RBI acting accordingly without protest is being seen as an infringement on its autonomy, but the autonomy has not been affected as according to the RBI Act, the central government can issue directions to the bank after consultations with the RBI governor which it considers necessary in the public interest. This clause ensures that all major decisions are made by the government as they have been elected and hence are accountable to the people. The RBI board simply performed its duty by implementing the decision.

Government while demonetising the currency notes was acting within the norms of the law and did not assault the autonomy of the central bank. Increased coordination and cooperation between the two bodies would reinforce RBI’s autonomy in setting interest rates, regulation of banks or in other operational spheres.

The decision of the government to set up a debt management agency is motivated by the conflict of interest for RBI as a debt manager and policy rate decider. Further, it is the duty of and elected responsible government to decide the target for inflation and growth.

All this said, what RBI should be allowed is complete operational autonomy to set the monetary policy in achieving the targets set as it deems fit. Further, the government should not at all interfere in the management and regulation of the banking sector as it has vested interests on account of being the owner of all public sector banks.

The RBI and the Government are the two tyres of the Indian economic bicycle. Both must perform in order to move forward. The recent doubts appear more motivated by political interests rather than a genuine concern for RBI autonomy.

BIBLIOGRAPHY

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Global Subprime Crisis Impact on India

bbamantra — Thu, 15 Jun 2017 10:56:53 +0000

Global Subprime Crisis emerged in the US housing mortgage market in the year 2007 and gradually snowballed into a global financial crisis, leading to a global economic recession.

The transmission of shocks of the crisis was mainly in two phases. First, it started with Inflation and then led to global financial crisis. There was a simultaneous increase in food and commodity prices throughout the world causing inflation. This led to global financial crises followed by a global recession.

During the initial phase the Indian financial markets were unaffected as direct exposure of banks to subprime assets was negligible. The domestic growth process was mainly demand driven which remained intact.

There was a rapid growth in India`s international trade in goods as well as services. Further in 2000s information technology facilitated cross-border delivery of services. With increasing global integration, the Indian economy was subjected to greater influence of global business cycles. Global stock prices and global economic developments started having a greater influence on domestic economy.

Global Subprime Crisis Impact on India

Demand Shocks
Foreign Institutional Investors started disinvesting
International Trade also suffered due to lack of demand for exports

Global Subprime Crisis Impact on Financial Markets

Reversal of Capital flows
Sell-off in the equity market by Foreign Institutional Investors
It put pressure on the dollar liquidity in the domestic market
Adverse Balance of Payment Expectations
This led to a downward pressure in the value of Indian Rupee

Global Subprime Crisis Impact on Banks

Indian Banks were not significantly affected and were well capitalised and inherently sound but reduced foreign funding put pressure on non-banking financial companies and asset management companies which translated into liquidity problems for NBFCs and AMCs as mutual funds were an important source of funds for NBFCs and AMCs.

Global Subprime Crisis Impact on Indian Economy

There was moderation in growth in the Indian economy in the year 2008-09 as compared to previous 5 years.
Export growth suffered due to external Demand Shocks ; exports dropped from 40% (Q2) to -15% (Q3) to -22% (Q4) in the year 2008-09
Reduced aggregate demand lead to reduced growth in private consumption
There was increase in Demand for bank Credit as external sources of credit were unavailable
There was pressure on banks for funding Liquidity

Measures taken to overcome the effects of Global Subprime Crisis by India

R.B.I adopted various liquidity augmenting measures to augment the domestic and foreign exchange liquidity problems. It sharply reduced its Key rates. From Oct 2008 to April 2009 there was unprecedented policy activism.

It reduced the CRR Cash Reserve Ratio by cumulative 400 basis points to 5% which helped banks to expand credit facilities. This also raised the value of money multiplier leading to increase in Broad Money. The money multiplier increased to 4.8 (March 2009) from 4.3(March 2008). The increase in money multiplier ensured steady increase in money supply consistent with liquidity requirements of the economy.
The Repo rate was reduced by 425 points to 4.75%
The Reverse Repo Rate was reduced by 275 basis points to 3.25%
The banks continued to expand credit and meet the fund requirements of mutual funds and NBFCs.

The Government took some significant fiscal measures. There was an increase in aggregate public expenditure and taxes were reduced which increased the overall aggregate demand in the country. The fiscal Deficit rose by 3.5% of GDP in 2008-09 and the government final consumption expenditure registered a sharp increase in Q3 and Q4 of 2008-09.

Conclusion

Despite sound economic structure and no direct exposure to the sub-prime assets, India was affected by the global financial crisis reflecting increasing globalisation of the Indian economy. The policy response from the RBI and the government was swift. While the fiscal policy cushioned the falling demand, the monetary policy augmented both domestic and foreign exchange liquidity problems.

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12th Five Year Plan (India) – Overview and Objectives

bbamantra — Sun, 15 Jan 2017 12:11:47 +0000

India was left with crippling economy when the British left. After Independence, India needed well planned strategies to sustain and grow the economy and compete with other developing countries.

In 1947 a committee on economic planning was formed under the chairmanship of Pundit J. L. Nehru, which suggested the plan to constitute a Planning Commission. On March 1950, The Planning Commission was set up by a Resolution of the Government of India to promote economic growth, efficient exploitation of country`s resources and increasing business and employment opportunities.

Five year plans	Year	Target growth rate of GDP (%)	Target Achieved (%)
First plan	1951-56	2.1	3.6
Second plan	1956-61	4.5	4.21
Third plan	1961-66	5.6	2.72
Fourth plan	1969-74	5.7	2.05
Fifth plan	1974-79	4.4	4.83
Sixth plan	1980-85	5.2	5.54
Seventh plan	1985-90	5.0	6.02
Eight plan	1992-97	5.6	6.68
Ninth Plan	1997-02	6.5	5.55
Tenth plan	2002-07	8.0	7.8
Eleventh plan	2007-12	9.0	7.9
Twelfth plan	2012-17	8.0	–

On 4^th October, the government of India approved the 12th five year plan (2012-17) that aims to achieve annual average economic growth rate of 8.2 per cent, down from 9 per cent (Eleventh plan 2007-12).

The aim of the 12th Five Year plan is to achieve “faster, sustainable and more inclusive growth”. For this purpose it seeks to achieve 4% growth in agriculture sector and 10% in manufacturing sector. The total budget of 12th Five Year plan has been estimated at Rs.47.7 lakh crore which is 135 per cent more than that for the 11th Five year Plan (2007-12).

The 12th Five Year Plan presents three scenarios:

Strong Inclusive Growth	8% growth in GDP
Insufficient Action	6% to 6.5% growth in GDP
Policy logjam	5% to 5.5% growth in GDP

Broad Objectives of 12th Five Year Plan

To reduce poverty
To improve regional equality across states and within states
To improve living conditions for SCs, STs, OBCs, Minorities
To generate attractive employment opportunities for Indian youth
To eliminate gender gaps

12th Five Year Plan lists various growth indicators as follows:

It aims at average GDP growth rate of 8%
It seeks to achieve 4% growth in agricultural sector
It aims at reducing head-count poverty by 10%
It aims at generating 50 million work opportunities in non-farm sector and providing skill certifications
It aims at eliminating gender and social gap in education
Reducing Infant Mortality Rate (IMR) to 25, Merternal Mortality Rate (MMR) to 100 and Total Fertility Rate (TFR) to 2.1
Increasing infrastructure investment to 9% of GDP
Achieving universal road connectivity and access to power for all villages
Provision of banking services for 90% households
Major welfare benefits and subsidies via Aadhaar card
Secondary Education for all by 2017
Increase public spending from 1% (11^th plan) to 2.5% of GDP by the end of 12^th
Development of a National Action Plan for Climate Change to achieve target of 20% to 25% reduction in emission levels by 2020
Getting 5 Indian universities in the list of top 200 universities in the world
For the purpose of providing electricity to households it aims at addition of 88,000 MW electricity generation capacity and 55,000 MW of renewable energy capacity.
Eliminate gender and social gap in school enrollment
Improving child sex ratio (0-6) to 950
Reducing under nutrition among children aged 0-3 to half of the NFHS-3 level
Increasing Gross Irrigated area from 90 million hectares to 103 million hectares
Connecting all villages with all-weather roads and upgrading national and state highways to minimum two-lane standard
Complete Eastern and Western Dedicated Freight Corridor
Increase rural tele-density to 70%, currently it is 40.81%
Ensuring 50% of rural population has access to 40 lpcd piped drinking water supply and 50% of Gram Panchayat achieve Nirmal Gram Status
Increasing Green Cover (as measured by Satellite Imagery) by 1 million hectare every year
It has proposed a modified Accelerated Irrigation benefits program and expanded Watershed Management project

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National Income – Meaning, Concepts, Aggregates, Methods

bbamantra — Mon, 12 Sep 2016 15:05:07 +0000

National income is the sum total of money value of all the final goods and services produced within the domestic territory of a country in an accounting year plus the net factor in come from abroad.

National Income = Value of Goods + Value of Service + Net Factor Income from Abroad

What is National Income?

It is the sum total of the value of all the final goods and services produced in an economy during one year.
All goods and services and measured in terms of money.
It includes net factor income from abroad.

Factor Income/Payment – Factor payments are rewards received by the owners of factors of production like land, labour, capital and entrepreneurship from industries abroad. They may be in form of:

Employee compensation
Profit
Interest
Rent

The people residing in India also give factor payments for using factors of production owned by people abroad like payment for importing goods, use of foreign technology etc.

Net Factor Income from Abroad (NFIA) – It is the difference between Factor Income received from abroad by residents of a country and the factor payments made by the residents of a country for factor services rendered by non-residents.

Basic Concepts of National Income

(1) Gross Domestic Process (GDP) – It refers to the money value of all the goods and services that are produced within the domestic territory of a country during a certain period usually a year.

The goods and services in question may be consumer goods and services or capital goods and services, they may be durable or non-durable products, they may be produced by private sector or public sector but it does not include value of intermediate goods and services.

(2) Net Domestic Product (NDP) – When depreciation on fixed capital used in production of goods and services is deducted from the GDP (gross domestic product) of a country we get Net Domestic Product

NDP = GDP – Depreciation

GDP = NDP + Depreciation

(3) Gross National Product (GNP) – When we add the net factor income from abroad (NFIA) to the GDP of a country we get Gross national Product.

GNP = GDP + NFIA

GDP = GNP – NFIA

(4) Net National Product (NNP) – It refers to the total value of all the final goods and services produced in an economy during a certain period after deduction of depreciation.

NNP = GNP – Depreciation

(5) Net Domestic Product (NDP) – It we deduct the net factor income from abroad from the net national product we get Net Domestic Product.

NDP = NNP – NFIA

NNP = NDP + NFIA

(6) NDP at Factor Cost and NDP at Market Price

Net Domestic Product @ Factor cost – It refers to the total value of earnings received by all the factors of production within the domestic territory of a country during a year. NDP @ FC includes cost of Compensation of Employees + Operating Surplus + Mixed Income

Net Domestic Product @ Market Price – It refers to the market value of all the final goods and services produced within the domestic territory of a country during a year.

For a stable economy the NDP @ FC and NDP @ MP must be equal.

NDP_fc = NDP_mp – Indirect taxes + Subsidies

NDP_mp = NDP_fc + Indirect taxes – Subsidies

(7) Personal Income – It is the income actually received by the individuals or households in a country during one accounting year, but undistributed profits of enterprise and Taxes are deducted from private income as they are not distributed.

Personal Income = Private Income – Undistributed profits – Corporate Profits – Retained earnings of foreign companies – Taxes

(8) Private Income

Private Income = National Income – Income from Property, Entrepreneurship, commercial and administrative enterprises – savings of non-departmental enterprise of the government

+ Interest on National Debt + Net current transfers from Government + Current Transfers from Abroad

(9) Personal Disposable Income (PDI) – Portion of Income from Personal Income that is available for individuals for actual consumption.

PDI = Personal Income – Personal Taxes – Direct Taxes – Fines, fees, receipts of Govt.

(10) Other:

Real Income – National Income expressed in terms of general level of prices.

Operating Surplus = Rent + Interest + Profit + Dividend and Other similar income

Mixed Income = Labour Income + Property Income

Net Indirect Taxes = Indirect taxes + Subsidies

National Income Aggregates

National Income – NNP_fc or NI_fc = NI_mp – Indirect taxes + subsidies

Or NI_fc = NI_mp – Net Indirect Taxes

GDP_mp = GNP_mp – NFIA

GNP_mp = GDP_mp = NFIA

GDP_fc = GDP_mp – Net Indirect Taxes

GNP_fc – GNP_mp – Net Indirect Taxes

NDP_mp = GDP_mp – Depreciation

NI_fc or NNP_mp = GNP_mp – Depreciation

NDP_fc = GDP_fc – Depreciation

NI_fc or NNP_fc = GNP_fc – Depreciation

Gross National Disposable Income (GNDI) = GNP_mp + Net Current transfers from rest of the world

Net National Disposable Income (NNDI) = NNP_mp + Net Current Transfers from rest of the world

To get from GDP to NDP deduct (-) Depreciation)
To get from NDP_mp to NDP_fc deduct (-) net indirect taxes
To get from GDP_mp to GNP_mp deduct (-) Net Factor Income from Abroad

Methods of Measuring National Income

(1) Product/Output/Value Added Method –

National Income = GDP_mp – Depreciation + NFIA – Indirect Taxes + Govt. Subsidies

(2) Income Method –

National Income = Wage + Rent +Interest + Dividend + Undistributed Profit (Operating Surplus)

+ Opening Stock of Public Enterprise

+ Mixed Income from Self Employed

+ Direct taxes collected by government

+ Net Factor Income From Abroad (NFIA)

+ Value of Production for self-consumption

(3) Expenditure Method –

National Income = Private Consumption + Private Investment + Government Consumption + Changes in Stock + Net Exports of Goods and Services

Net Exports of Goods and Services = Exports – Imports

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Introduction to Macro Economics – Nature, Scope, Importance & More

bbamantra — Tue, 06 Sep 2016 18:17:17 +0000

The term ‘Macro’ has been derived from a Greek word ‘Macros’ meaning ‘large’. Thus, Macro Economics is the study and analysis of an economy as a whole.

Macro Economics involves the study of:

the behaviour of an economic system as a whole
aggregates and averages covering the entire economy
behaviour of large aggregators such as:
Total Employment
National Product
National Income
Price-Levels etc.

Macro Economics deals with problems such as:

Unemployment in the country
Inflation/Deflation
Economic Growth
International Trade
National Output
National Expenditure
Level of Savings & Investment

Scope of Macro Economics:

The scope of Macro Economics lies in the study of analysis of the following:

Theory of Employment
Income Theory
Theory of Price level
Theory of Growth
Distribution Theory
Theory of National Income

Nature/Characteristics of Macro Economics:

It is a study of national aggregates
It studies economic growth
It ignores individual differences between aggregates

Importance of Macro Economics:

It helps to understand working of the whole economy
It helps in formulation of economic policies
It studies and analyses growth and development in an economy
It helps in development of micro-economic theories

Difference between Micro Economics and Macro Economics

	Micro Economics	Macro Economics
Meaning	It studies individual units of an economy	It studies the economy as a whole
Field of Study	It studies individual economic units such as: a consumer, a firm, a household, an industry, a commodity etc.	It studies national aggregates such as: national income, national output, general price level, level of employment etc.
Problems	It deals with micro problems such as determination of: price of a commodity, a factor of production, satisfaction of a consumer etc.	It deals with problems at a macro level like problems of employment, trade cycles, international trade, economic growth etc.
Nature	It is based on disaggregation of units	It is based on aggregation of units
	It considers individual differences between different units	It does not consider individual differences between aggregates
Objectives	Maximize Utility	Full Employment
	Maximize Profits	Price Stability
	Minimize Costs	Economic Growth
		Favourable Balance of Payment situation
Methodology	Static Analysis i.e. Does not explain the time element Equilibrium conditions are measured at a particular period.	Dynamic Analysis i.e. It is based on time lags, rates of change, past and expected values of variables

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Rent & Types of Rent

bbamantra — Sun, 14 Aug 2016 10:09:04 +0000

Classical definition of Rent:

According to Caver, “Rent is the price paid for use of land”

According to David Ricardo, “Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil”

Modern Definition of Rent:

Rent is the difference between the actual earnings of a factor unit and its transfer earnings* i.e. the difference between the actual payment made to a factor and the supply price of the factor.

*Transfer Earnings: Earnings made by transferring services to some other use.

Types of Rent

In Economics, there may be the following types of rent:

Economic Rent – It is the payment made for the use of land or payment for the use of scarce natural resources.

Scarcity Rent – Scarcity of rent is the main cause of emergence of Rent. Therefore scarcity rent is the price paid for the use of a homogeneous land when its supply is limited in relation to its demand.

Differential Rent – According to Ricardo rent arises due to difference in fertility of land. Thus the surplus production which arises due to difference in fertility of lands is called differential rent.

Situational Rent – It refers to the rent arising out of difference in situation of land .i.e. it simply means that the lands situated near the markets will have more rent than the land far from markets due to the situation of land.

Contractual Rent – It refers to the amount mutually agreed upon between the owner and the tenant by a contract. The amount directly depends upon the demand and supply of land in the market.

Gross Rent – It is the entire amount that a tenant pays to the owner of a land. It includes:

Economic Rent
Interest on amount invested on land
Reward for risk taken by the landlord

Quasi Rent – It refers to the surplus earned by the man-made factors of production whose supply is inelastic or fixed in the short run but elastic in the long run.

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Monetary policy of India

bbamantra — Fri, 15 Jul 2016 11:23:19 +0000

Project/Slides/Presentation Transcript

Subject: Business Environment, Macro-Economics

Topic: Monetary Policy of India

Slide 1 – Monetary policy of India presentation

Slide 2 – Introduction

It refers to a set of policies by the monetary authority (Central Bank) which regulate the money supply and credit flows in the economy to achieve certain macroeconomic goals .

In India, RBI plays the role of the central bank and formulates the monetary policies of India.

Slide 3 – Meaning of Monetary policy
It is the process by which the monetary authority of a country, controls the supply of money in the economy by manipulating interest rates in order to maintain price stability and achieve economic growth

Slide 4 – Objectives of Monetary Policy

The main objectives of monetary policy of India are –
Economic growth
Increase in employment
Price stability and inflation control
Exchange rate stability
Balance of payments equilibrium
Reducing income inequality

Slide 5 – Instruments of Monetary policy of India

All instruments of the monetary policy of India can be categorized under two categories –
Quantitative measures– Bank rate,CRR, SLR, Repo rate, Reverse repo rate, Open market operations
Qualitative measures – moral suasion, change in margin requirements, direct controls, credit rationing,

Slide 6 – Bank Rate
Bank rate is the rate at which RBI lends money to the commercial banks.
An increase in bank rate is likely to increase all other interest rates and decrease the total money supply. Therefore it is a contractionary monetary policy.
Decrease in bank rate is likely to decrease all other interest rates and increase the total money supply. Therefore it is an expansionary monetary policy.

Slide 7 – Cash Reserve Ratio
Banks have to keep a certain minimum percentage of their total deposits (demand deposits + time deposits) with the RBI, that minimum percentage is called CRR.
An increase in CRR will result in less liquid cash deposits with the banks and is a contractionary monetary policy.
A decrease in CRR will result in more liquid cash available with the banks and it is an expansionary monetary policy.
Slide 8 – Statutory Liquidity ratio
SLR stands for Statutory liquidity ratio.
Banks are supposed to maintain a minimum percentage of their total deposits as a sum of excess reserve (ER), cash balance with other banks (CB) and government securities(GS). That percentage is called SLR.
SLR = (ER+CB+GS)/(Total deposits)
Increase in SLR is contractionary policy and decreases in SLR is expansionary policy.

Slide 9 – Repo rate
Repo means repurchase operations.
It is the rate at which the RBI lends money to banks against government securities.
When the repo rate increases it becomes expensive for banks to borrow money from RBI and the money supply decreases, therefore it acts as a contractionary monetary policy. The decrease in repo rate will increase the money supply and it is a type of expansionary monetary policy.

Slide 10 – Reverse repo rate
The rate which other banks receive when they deposit their extra cash with RBI along with the repurchase agreement of government securities in future is called reverse repo rate.
An increase in reverse repo rate results in decrease of money supply and is a contractionary measure.
A decrease in reverse repo rate increases the money supply and it is expansionary measure.

Slide 11 – Open Market Operations
Buying and selling of government securities by the RBI in the open market is called open market operations.
When RBI buys government securities the money supply increases
When RBI sells government securities the money supply decreases

Slide 12 – Qualitative measures of Monetary policy in India
It is also called the selective credit controls since these policies affect only certain aspects.
Credit rationing refers to the control of government over the amount of credit available for certain industrial sectors. Such control is exercised to ensure that all sectors get adequate amount of credit.
Change in margin requirements affects the minimum amount of money that an individual is required to use from his own resources when he borrows money from the bank.
Slide 13 – Qualitative measures of Monetary policy
Moral suasion is the method by which RBI persuades and convinces the banks to undertake certain actions which are in the economic interests of the country.
When all methods prove ineffective, RBI may take direct actions by laying down specific rules and regulations under which banks operate.

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