Business Environment- Unit II- UPTU

Indian Financial System
• Monetary Policy
• Fiscal Policy

Monetary policy is the process by which
monetary authority of a country, generally
a central bank controls the supply of
money in the economy by exercising its
control over interest rates in order to
maintain price stability and achieve high
economic growth.
What is Monetary Policy??

• Monetary policy rests on the relationship
between the rates of interest (price at which
money can be borrowed)in an economy and
the total supply of money.
• Monetary policy uses a variety of tools to
control one or both of these, to influence
outcomes like economic growth, inflation,
exchange rates with other currencies
and unemployment
What is Monetary Policy?..

• Monetary theory provides insight into how to craft optimal monetary
policy and can be either expansionary or contractionary.
• An expansionary policy increases the total supply of money in the
economy more rapidly than usual
• Expansionary policy is traditionally used to try to
combat unemployment in a recession by lowering interest rates in
the hope that easy credit will entice businesses into expanding.
Basic Approach to Monetary Policy

Contractionary policy expands the
money supply more slowly than usual or
even shrinks it.
Contractionary policy is intended to
slow inflation in hopes of avoiding the
resulting distortions and deterioration of
asset values.
Basic Approach to Monetary Policy…

History of Monetary Policy
• For many centuries there were only two forms of monetary
policy: (i) Decisions about coinage; (ii) Decisions to
print paper money to create credit. Interest rates, while
now thought of as part of monetary authority, were not
generally coordinated with monetary policy.
• With the creation of the Bank of England in 1694, which
acquired the responsibility to print notes and back them
with gold, the idea of monetary policy as independent of
executive action began to be established.

History of Monetary Policy….
• Central banks as part of the gold standard began setting the interest
rates which they charged, from borrowers who required liquidity. This
required almost monthly adjustments of interest rates.
• During the 1870-1920 period, the industrialized nations set up central
banking systems, with the role of the central bank as the "lender of
last resort”.
• Later, economists evolved ways to control money for financial
stability & growth. Classical economists /Monetarists emphasized
‘money supply’ where as Keynesian economists emphasized the
‘interest rate channel’.

Considerations for Monetary Policy
Monetary decisions today take into account a wider range of
factors/monetary variables, such as:
– short term interest rates;
– long term interest rates;
– velocity of money through the economy;
– exchange rates;
– credit quality;
– bonds and equities (corporate ownership and debt);
– government versus private sector spending/savings;
– international capital flows of money on large scales;
– financial derivatives such as options, swaps, futures contracts, etc.

Monetary Authority in India
• There are two monetary authorities in India: the Central
government and the RBI. Central government is more
powerful.
• The central monetary authority is the Reserve Bank of
India (RBI)
• RBI formulates, monitors and regulates the monetary policy,
which aims at financial stability in the country.

• The process of monetary policy formulation in
India had traditionally been largely internal.
• The process has, over time, become more
consultative and participative with an external
orientation.
• Wide range of inputs taken from various
stakeholders
Monetary Policy Formulation in India

• The three concerned research departments –
– Monetary Policy Department (MPD)
– Department of Economic and Policy Research (DEPR) and
– Department of Statistics and Information Management (DSIM)
• Provide independent technical inputs and
assessment
• Meeting chaired by the Governor and attended by
the top management.

• Consultations are held with
– 20 large commercial banks
– Indian Banks Association (IBA),
– Urban and rural co-operative bank/credit associations
– Association of non-banking financial companies (NBFCs).
• Reserve Bank has constituted a technical advisory
committee (TAC) on monetary policy with outside
(foreign) experts, though its role remains advisory.

• Monetary policy framework is a continuously
evolving process based on the
– Level of development of financial markets and
institutions
– Degree of global integration.
• Monetary policy framework in India has undergone
significant transformation over time.
Monetary Policy Framework in India

• India followed a Monetary Targeting Framework during the
mid-1980s till 1997-98 under which broad money (money
supply-M3) was used as an intermediate target for monetary
policy.
• Recognizing the challenges posed by financial liberalization,
the Reserve Bank switched to a Multiple Indicator Approach
in 1998-99.
• Under the multiple indicator approach, while broad money
continued to remain an information variable, greater
emphasis was placed on rates of interest for monetary policy
formulation.
Monetary Policy Framework in India…

INSTRUMENTS OF MONETARY POLICY
• Measures adopted by RBI to control credit:
– Bank Rate of Interest
– Cash Reserve Ratio
– Statutory Liquidity Ratio
– Open market Operations
– Margin Requirements
– Various other Innovative measures

Bank Rate of Interest
• It is the interest rate which is fixed by the Central bank
to control the lending capacity of Commercial banks.
• During Inflation , RBI increases the bank rate of interest
due to which borrowing power of commercial banks
reduces which thereby reduces the supply of money or
credit in the economy.
• When Money supply Reduces it reduces the purchasing
power and thereby curtailing Consumption and lowering
Prices.

Cash Reserve Ratio
• CRR, or cash reserve ratio, refers to a portion of deposits (as
cash) which banks have to keep/maintain with the Central
bank (RBI).
• During Inflation RBI increases the CRR due to which
commercial banks have to keep a greater portion of their
deposits with the RBI.
• This serves two purposes. It ensures that a portion of bank
deposits is totally risk-free and secondly it enables that RBI
control liquidity in the system, and thereby, inflation.

Statutory Liquidity Ratio
• Banks are required to invest a portion of their
deposits in government securities as a part of
their statutory liquidity ratio (SLR)
requirements.
• If SLR increases the lending capacity of
commercial banks decreases thereby regulating
the supply of money in the economy.

Open market Operations
• It refers to the buying and selling of Govt.
securities in the open market.
• During inflation RBI sells securities in the open
market which leads to transfer of money to
RBI. Thus money supply is controlled in the
economy.

Currency Board
• A currency board is a monetary arrangement that pegs the monetary
base of one country to another, the anchor nation.
• It essentially operates as a hard fixed exchange rate, whereby local
currency in circulation is backed by foreign currency from the anchor
nation at a fixed rate.
• Thus, to grow the local monetary base an equivalent amount of
foreign currency must be held in reserves with the currency board.
• This limits the possibility for the local monetary authority to inflate
or pursue other objectives

• RBI is empowered to control credit on a
qualitative basis i.e. on selective manner.
• SCC was first introduced in 1956 to check
speculation activities in the market and thereby
control the flow of credit selectively.
• Stricter controls are imposed on 6 basic groups
of commodities:
– Food grains, sugar, oil seeds, cotton, vegetable oils
and cotton textiles.
Selective Credit Control (SCC)

Introduction
to
Fiscal Policy: Meaning,
Objectives &
Instruments

THE FISCAL POLICY
•Fiscal policy deals with the taxation
and expenditure decisions of the
government.
•Monetary policy, deals with the
supply of money in the economy and
the rate of interest.

Importance of Fiscal Policy
Popularity of the fiscal policy since the 1930s is due to:
• The ineffectiveness of monetary policy as a means of
overcoming the severe unemployment of the Great
Depression.
• The growing importance of government spending and
taxation in relation to the economy's total income and output.

OBJECTIVES OF FISCAL POLICY
•The fiscal policy of the government as regards
taxation, public borrowing and public expenditure is
always formulated with specific objectives in view.
•These objective are to produce desirable effects and avoid
undesirable effects on the national income, production,
employment, and general price level
•Economic Stability Vs Economic Development
•In most modern economies, the government deals with
fiscal policy while the central bank(RBI) is responsible
for monetary policy.

The main instruments of fiscal policy are
• Taxation
• Public borrowings,
• Forced saving (or deficit financing)
• Public expenditure .
INSTRUMENTS OF FISCAL POLICY

Taxation
•Taxation is the most important source of public revenue of
both developed and developing countries.
•More important for developing countries, as the size of
government’s development program depends largely on the
economic and administrative capacity of its tax system to
mobilize the necessary resource.

Public Borrowing
•After taxation, public borrowing is the second most
important source of public revenue.
•It is different in nature from taxes, since all
borrowing from the public must be repaid; fund-
raising exercise.
•Two ways to raise public debt
–Voluntary loan: Issue of bills & securities in money market
–Compulsory loan: contribution to provident fund, pension fund etc..

Government Securities
Government security is a tradable instrument issued by the Central Government or the State Governments.
It acknowledges the Government’s debt obligation.
Such securities are short term (usually called treasury bills, with original maturities of less than one year) or
long term (usually called Government bonds or dated securities with original maturity of one year or
more).
In India, the Central Government issues both, treasury bills and bonds or dated securities while the State
Governments issue only bonds or dated securities, which are called the State Development Loans
(SDLs).
Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged
instruments.
Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.)
or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.).
a. Treasury Bills (T-bills)
Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the
Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day.
b. Cash Management Bills (CMBs)
The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills,
they are also issued at a discount and redeemed at face value at maturity.
c. Dated Government Securities
Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate)
which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated
securities can be up to 30 years.

Forced Saving or Deficit Financing
• A new weapon in the armory of fiscal tools
• Deficit financing occurs when there is excess of
expenditure over current revenue receipts
• It was used during the period of Great Depression in the
1930s to stimulate private investment.
INSTRUMENTS OF FISCAL POLICY….

• When a government spends more than what it currently receives in
the form of taxes and fees during a fiscal year, it runs in to a deficit
budget. When the budget deficit is financed by borrowing from the
public and banks, it is called deficit financing.
• Deficit financing refers to the borrowing undertaken by the
government to make up for the revenue shortfall. It is the best
stimulant for the economy in short term. However, in the long term
it becomes a drag on the economy and becomes the reason for rise
in interest rate
Sources of Financing Deficit
• There are three methods or sources which are used to finance
budgetary deficits. Each method of financing has its own macro
economic implications.
• The methods of deficit financing are:
(1) Bank borrowing.
(2) Non-bank borrowing / Domestic Borrowing.
(3) External borrowing.
Deficit Financing….

Public Expenditure
Reasons for massive increase in public expenditure are
• Building up of infrastructure and large capital goods
industries.
• Meeting social obligation like provision of cheap or
free public services, education, housing etc.
• Providing subsidies to various sectors particularly the
farm sector.
• Undertaking various public works programs.
INSTRUMENTS OF FISCAL POLICY….

• Capital Formation
– Fiscal policy of the country is playing an important role in increasing the rate
of capital formation in the public and private sectors.
• Mobilization of Resources
– Fiscal policy of the country has been helping to mobilize a considerable
amount of resources through taxation, public debt and other sources for
financing its various developmental projects.
• Incentives to Savings
– Providing various incentives to raise the saving rate both in household and
corporate sector by various budgetary policy changes like tax exemption, tax
concession etc.
• Inducement to Private Sector
– Various inducements like subsidies, tax exemptions, concessions etc. are
provided to private sector to expand their activities.
• Reduction of Inequality
– Progressive taxes on income and wealth tax exemption, subsidies etc.
• Export Promotion
– Concessions and subsidies are provided by govt. to promote exports.
• Alleviation of Poverty and Unemployment
– Various poverty eradication and employment generation programmes are
employed in order to reduce poverty and unemployment. Eg: IRDP (Integrated
rural development prog), JRY (Jeevan Rekha Parishad)
Merits of Fiscal Policy of India

• Instability
– Failed to achieve stability on various fronts. Growing volume of
deficit financing has created inflationary rise in price levels.
• Defective Tax Structure
– Tax structure has failed to raise the productivity of direct taxes.
Therefore country has been relying on indirect taxes.
• Inflation
– Unable to stop the inflationary rise in price level. The higher rate
of indirect taxation has resulted in cost-push inflation.
• Negative Return of the Public Sector
– In spite of having huge total investment in public sector, the
return on investment has been mostly negative.
• Growing Inequality
– The growing trend of tax evasion has made the tax machinery
ineffective. And the reliance on indirect taxes has made the tax
structure as regressive.
Shortcomings of Fiscal Policy of India

India’s Fiscal Policy
:Trends

OBJECTIVES OF FISCAL POLICY
IN INDIA
• To improve the growth performance of the
economy - mainly in two ways.
• By mobilizing resources for development.
• By improving the efficiency of resource
allocation
• Fiscal Policy also used to achieve equity.

THEMES OF THE ‘NEW FISCAL POLICY’
• A systematic effort to simplify both the tax structure and
the tax laws
• A deliberate shift to a regime of reasonable direct tax
rates, combined with better administration and
enforcement, to improve compliance and raise revenues
• The fostering of a stable and predictable tax policy
environment
• Greater recognition and weight given to the resource
allocation and equity consequences of taxation

• More reliance on nondiscretionary fiscal and financial
instruments in managing the economy, as compared to
adhoc, discretionary physical controls
• Concerted efforts to improve tax administration and
reduce the scope for arbitrary harassment
• Growing appreciation of the links between fiscal and
monetary policy;
• Fresh initiative to strengthen methods of expenditure
control.
THEMES OF THE ‘NEW FISCAL POLICY’

Introduction:
• A company form of organisation is a business entity
which is established under provision of India`s
Companies Act 1956, through promotion,
incorporation and floatation.

WHAT IS A
STOCK MARKET?
 A stock market or equity market is a public entity for
the trading of company stock (shares)
and derivatives at an agreed price.
 These are securities listed on a stock exchanges as well
as those only traded privately.
 The stocks are listed and traded on stock exchanges
which are entities of a corporation or mutual
organization. The largest stock market in the USA, by
market capitalization, is the NYSE.

Importance of Stock Market:
• Function and purpose:
The stock market is one of the most important sources
for companies to raise money. This allows businesses to
be publicly traded, or raise additional capital for
expansion by selling shares of ownership of the
company in a public market.

 History has shown that the price of shares and other
assets is an important part of the dynamics of economic
activity, and can influence or be an indicator of social
mood.
 An economy where the stock market is on the rise is
considered to be an up-and-coming economy.

WHAT ARE STOCKS?
At some point, just about every company
needs to raise money
In each case, they have two choices:
Borrow the money, or
Raise it from investors by selling them a stake
(issuing shares of stock) in the company

When you own a share of stock, you are a
part owner in the company with a claim
(however small it may be) on every asset and
every penny in earnings.
Individual stock buyers rarely think like
owners, and it's not as if they actually have a
say in how things are done. Nevertheless, it's
that ownership structure that gives a stock
its value

WHAT IS A STOCK EXCHANGE ?
• A market in which securities are bought and sold: "the
company was floated on the Stock Exchange".
• The initial offering of stocks and bonds to investors is
by definition done in the primary market and
subsequent trading is done in the secondary market.
• A stock exchange is often the most important
component of a stock market.
• Supply and demand in stock markets are driven by
various factors that, as in all free markets, affect the
price of stocks.

ROLE OF STOCK EXCHANGE
• Raising capital for business:- common forms of raising capital-
• Mobilizing savings for investments.
• Creating investment opportunities for small companies.
• Government capital rising for development projects.
• Facilitates company growth.
Going to
public
Limited
partnership
Venture
capital
Corporate
companies

HISTORY OF STOCK EXCHANGE
The stock exchange was established by “East India
company” in 18th century . In India it was established
in 1850 with 22 stock brokers opposite to town hall
Bombay .This stock exchange is known as oldest stock
exchange of Asia.

Initial members who are still running their
business in stock exchange are
D.S.Prabhudas &company
Jamnadas Morarjee
Champak lal Devidas
Brymohan Laxminarayan

BROKER AND JOBBER
BROKER: He is one acts as a intermidiary on
behalf of others. A broker in a stock exchange ,is
a commission agent who transacts business in
securities on behalf of non members.
JOBBER: He is not allowed to deal with the
public directly .He deals with brokers who are
engaged with the investors . Thus, the securities
is bought by the jobber from members and sells
to members who are operating on the stock
exchange as broker.

DIFFERENCESBETWEEN A JOBBER AND A BROKER
JOBBER
 A jobber is an independent
dealer in securities, purchasing
or selling securities on his own
account
 A jobber deals only with the
brokers ,does not deal with the
general public
 A jobber earns profit from his
operations i.e., buying and
selling activities
 Each jobber specializes in certain
group of securities
BROKER
 A broker deals with the jobber
on behalf of his clients. in other
words, a broker is a middleman
between a jobber and clients
 A broker is merely an agent,
buying or selling securities on
behalf of his clients
 A broker gets only commission
for his dealings
 The broker deals in all types of
securities

SPECULATION AND SPECULATOR
 SPECULATION : It is the transaction of members to
buy or sell securities on stock exchange with a view to
make profits to anticipated rise or fall in price of securities.
 SPECULATOR : The dealer in stock exchange who
indulge in speculation are called speculator . They do not
take delivery of securities purchased or sold by them , but
only pay or rescue the difference between the purchase
price and sale price . The different types of speculators are
BULL
BEAR
STAG
LAME DUCK

BULL {TEJIWALA}
He is speculator who expects the future raise in price of
securities he buys the securities to sell them at future date
at the higher price.
He is called as bull because his activities resembles as a bull ,
as the bull tends to throw its victims up in the air through its
horns. In simple the bull speculator tries to raise the price of
securities by placing a big purchase orders.

BEAR {MANDIWALA}
He is speculator who
expects future fall in prices,
he does an agreement to
sell securities at future
date at the present market
rate .
He is called as bear because
his altitude resembles with
bear , as the bear tends to
stamp its victims down to
earth through its paws . In
simple the bear speculator
forces of prices of
securities to fall through
his activities.

STAG {DEER}
He operates in new issue
of market . He is just like a
bull speculator . He applies
large number of shares in
the issue market only by
paying, application money,
allotment money. He is not
a genuine investor because
, he sells the alloted
securities at the premium
and makes profit. In simple
he is cautious in his
dealings . He creates an
artificial rise in prices of
new shares and makes
profits.

LAME DUCK
He is speculator when the
bear operator finds it
difficult to deliver the
securities to the consumer
on a particular day as
agreed upon , he struggles
as a lame duck in fullfilling
his commitment . This
happens when the prices
do not fall as expected by
the bear and the other
party is not willing to
postpone the settlement to
the next period.

MAJOR STOCK EXCHANGES
ECONOMY STOCK EXCHANGE
US & EUROPE NYSE
US & EUROPE (NORTH) NASDAQ
JAPAN TOKYO STOCK EXCHANGE
UNITED KINGDOM LONDON STOCK EXCHANGE
EUROPE EURONEXT
CHINA SHANGHAI STOCK EXCHANGE
HONG KONG HONGKONG STOCK EXCHANGE
CANADA TORONTO STOCK EXCHANGE
BRAZIL BM&F BOVESPA

ECONOMY STOCK EXCHANGE
AUSTRALIA AUSTRALIAN SECURITIES EXCHANGE
GERMANY DEUTSCHE BORSE
SWITZERLAND SIX SWISS EXCHANGE
CHINA SHENZHEN STOCK EXCHANGE
SPAIN BME SPANISH EXCHANGES
INDIA BOMBAY STOCK EXCHANGE
SOUTH KOREA KOREA EXCHANGE
INDIA NATIONAL STOCK EXCHNGE
RUSSIA MICEX – RTS
SOUTH AFRICA JSE LIMITED

SOME INDIAN STOCK EXCHANGES
EXCHANGE
BOMBAY STOCK EXCHANGE
NATIONAL STOCK EXCHANGE
JAIPUR STOCK EXCHANGE
UP STOCK EXCHANGE ASSOCIATION
MADRAS STOCK EXCHANGE
COCHIN STOCK EXCHANGE
BANGLORE STOCK EXCHANGE
GAUHATI STOCK EXCHANGE
LUDHIANA STOCK EXCHANGE
CALCUTTA STOCK EXCHANGE
LOCATION
MUMBAI
MUMBAI
JAIPUR
KANPUR
CHENNAI
COCHIN
BENGULURU
GAUHATHI
LUDHIANA
KOLKATA
NSE AND BSE ARE THE MAJOR STOCK EXCHANGES IN INDIA.

BOMBAY STOCK EXCHANGE
BSE Limited formerly known as Bombay Stock
Exchange (BSE) , is the oldest stock exchange in
Asia.
It is a stock exchange located on Dalal Street,
Mumbai.
It the 6th largest stock exchange in Asia and the
14th largest in the world.

The BSE has the largest number of listed
companies in the world.
The BSE SENSEX, also called "BSE 30", is a
widely used market index in India and
Asia.
Though many other exchanges exist, BSE
and the National Stock Exchange of India
account for the majority of the equity
trading in India.
While both have similar total market
capitalization (about USD 1.6 trillion),
share volume in NSE is typically two times
that of BSE.

BSE BUILDING; BSE
DISPLAYS SENSEX ;
PEOPLE TRADING AT
THE BOMBAY STOCK
EXCHANGE

 The NSE is the virtual exchange where you can only trade online.

Stock trading
Stock trading is not just buying and selling stocks
at the stock market, there are so many other
factors that need to be taken care of for
successful stock trading.
Anyone who invests in the stock market wishes to
make profit from the investments. To ensure that
you get significant return from your investment
you have to pick up the right stocks at the right
time.
If you have decided to trade in stocks the first
thing that you need to decide is the stock
market where you will trade.

BSE NSE
Number of listed
companies
5,749 (as of Sep 2015) 1,696 (as of Sept 2015)
Market capitalization of
listed companies
US$ 1.7 trillion (23 Jan 2015) US$ 1.65 trillion (23 Jan 2015)
Main Index
BSE Sensex S&P CNX Nifty
Index value
25963 (as of Sep 2015) 7,899.15 (as of Sep 2015)
Location
Mumbai, India Mumbai, India
Claim to fame
Oldest stock exchange in Asia.
Largest stock exchange in
India in terms of daily
turnover and number of
trades.
Website www.bseindia.com www.nseindia.com
Established in 1875 1992

General Market Advice:
1. Never chase a stock.
2. Buy when markets are in the grip of panic.
3. Only buy fundamentally strong stocks, which
are undervalued.
4. Buy stocks grown in top line and bottom line
over the past years.
5. Invest in companies with proven management.
6. Avoid loss-making companies.
7. PE Ratio and Growth in earnings per share are
the key.

8. Look for the dividend paying record.
9. Invest in stocks for sure returns.
10. Stocks have been the high yielding asset
class over the past.
11. The basic property of any asset class is to
grow.
12. Buy when everyone is selling and sell
when everyone buys.
13. Invest a fixed amount each month.

National Income in India,
Concept and Measurement

Meaning of National Income
• National income is the money value of all the final goods
and services produced by a country during a period of one
year. National income consists of a collection of different
types of goods and services of different types.
• Since these goods are measured in different physical units it
is not possible to add them together. Thus we cannot state
national income is so many millions of meters of cloth.
Therefore, there is no way except to reduce them to a
common measure. This common measure is money.
• If the value of a meter of cloth is Rs. 20 and the total cloth
produced is 100 meters, then the money value of cloth is Rs.
2000. In this way we can find out the value of other goods
and services and the total value of all the goods and
services produced during one year.

Basic Concepts in National income
• Gross domestic product
• Gross domestic product at constant
price and at current price
• Gross domestic product at factor
cost and Gross domestic product at
market price

Basic Concepts in National income
•Net domestic product
•Gross national product
•Net national Product
•Net national product at factor
cost or national income

Gross Domestic Product
• Gross domestic product is
the money value of all final
goods and services
produced in the domestic
territory of a country during
an accounting year.

•Domestic territory Means
a. Territory lying within the political
frontiers, including territorial waters of
the country.
b. Ships and aircrafts operated by the
residents of the country between two or
more countries.

c. Fishing vessels, oil and natural gas rigs,
and floating platform operated by the
residents of the country in the international
waters or engaged in extraction in areas in
which the country has exclusive rights of
exploitation.
d. Embassies, consulates and military
establishment of the country located
abroad.

Gross Domestic Product at Constant
price and Current price
• GDP can be estimated at current prices and at
constant prices. If the domestic product is
estimated on the basis of the prevailing prices
it is called gross domestic product at current
prices.
• If GDP is measured on the basis of some fixed
price, that is price prevailing at a point of time
or in some base year it is known as GDP at
constant price or real gross domestic product.

GDP at Factor cost and GDP at Market price
• The contribution of each producing unit to the
current flow of goods and services is known as
the net value added. GDP at factor cost is
estimated as the sum of net value added by the
different producing units and the consumption of
fixed capital.
• Conceptually, the value of GDP whether estimated
at market price or factor cost must be identical.
This is because the final value of goods and
services must be equal to the cost involved in
their production.
• GDP F.C = GDP M.P – IT + S.

Net Domestic Product
• While calculating GDP no provision is made for
depreciation allowance (also called capital
consumption allowance). In such a situation gross
domestic product will not reveal complete flow of
goods and services through various sectors.
• A part of is therefore, set aside in the form of
depreciation allowance. When depreciation allowance is
subtracted from gross domestic product we get net
domestic product.
• NDP = GDP – Depreciation.

Gross National Product
• Gross national product is defined as the
sum of the gross domestic product and
net factor incomes from abroad. Thus in
order to estimate the gross national
product of India we have to add net factor
income from abroad - income earned by
non-resident in India to form the gross
domestic product of India.
• In brief GNP = GDP + NFIA.

Net National Product
• It can be derived by subtracting
depreciation allowance from GNP. It
can also be found out by adding
the net factor income from abroad
to the net domestic product.
• NNP = GNP - Depreciation

Net National Product
• If the net factor income from abroad
is positive then NNP will be more
than NDP, If the net factor income
from abroad is negative then NNP
will be less than NDP and it would be
equal when net factor income from
abroad is zero.
• NNP = NDP + NFIA

NNP at factor cost or National
Income
• NNP at factor cost is the volume of commodities
and services turned out during an accounting
year, counted without duplication. It can also be
defined as the net value added at factor cost in
an economy during an accounting year.
• NNP at factor cost or national income is defined
as the sum of domestic factor incomes and net
factor income form abroad. If NNP figure is
available at market price we will subtract indirect
taxes and add subsidies to the figure to get
NNP at factor cost or national income of the
economy.

NNP at factor cost or National Income
• NNP at FC = National Income = FID + NFIA
• FID factor income earned in the domestic territory of a
country.
• Net Factor Income from Abroad.
• NNPFC = NI = NNPMP – IT + S

Personal Income and Disposable income
• Personal income and disposable income are
two concepts of national income very
commonly used in advanced countries.
• Personal income may be defined as the
current income of persons or households
from all services. Personal income is not a
measure of production.

Disposable Income
• All personal income is not at the disposal to be spent on
consumption. Individuals have to pay personal direct taxes to
the government. They are free to spend only after the payment
of taxes.
• DPI = Personal income – Personal Direct taxes.
Disposable Personal Outlay
• The disposable personal income may be spent fully or
individuals may save. What remains after saving is called the
personal outlay. Disposable income is equal to consumption
and savings.
• Disposable outlay = Disposable income – Savings.

Methods of Measuring national income
• The national income of a country can be measured
in three alternative ways
• Census of production method
• As a flow of income, and
• As a flow of expenditure

Product Method
• This method is popular in U.S.A. and is called as Total Product
method or Goods Flow Method. In India, It is known as
inventory or Product method.
• In this method, the economy is classified in to three transaction
sector like industrial, services and foreign transaction sector
where international payments are considered.
• We calculate the money value of all final goods and services
produced in an economy during a year. The money value of
these goods and services is calculated at market price. The
sum-total is called the GDP at market price

Income Method
• We estimate the income earned by various factor
services engaged in the process of production. The
sum of these incomes provides us the measure of
gross national income at factor cost.
• GNP = wages and salaries + rent +interest +
Dividends + undistributed corporate profits +
mixed incomes + direct taxes + indirect taxes +
depreciation + net income from abroad.

Expenditure method
• Prof. Samuelson calls this as “ Flow of Product Approach”.
In India, it is known as Outlay method. GNP is the sum of
expenditure incurred on goods and services during one year
in a country.
• GNP = C + I + G + (x – M)
• Gross Private Consumption Expenditures(C)
• Gross Private Investment (I)
• Government Purchases (G)
• Net Exports (X - M)
• We sum up the flow of expenditure in an economy to arrive at
national income estimates, If we add the value of expenditure
on all these items we get the value of gross national
expenditure at market prices.

Trends in India’s national income growth and
structure
• Trend in NNP: The real national income of India has
increased at an annual average rate of 4.4% during the 55
years of economic planning. If we consider the last 14 years
we find that the rate of increase in the national income has
been around 6% per annum.
• During the tenth five year plan they set up the target of 8%
growth rate but achieved at 7.6%, this encouraged the
eleventh planners to set a target of 8.5% per annum growth
rate. Growth rate achieved is 8%.

Importance of National Income Analysis
• They provide as an index of economic activity and an
instrument of economic planning.
• National income accounting indicates the growth of
the economy in terms of income and output.
• National income statistics help the policy makers to
frame policies to achieve full employment and rapid
economic growth.
• A complete knowledge about the trends in national
income is essential in economic planning.

Introduction
• Balance of payments (BOP) accounts are an accounting
record of all monetary transactions between a country and
the rest of the world. These transactions include payments for
the country's exports and imports of goods & services,
financial capital, and financial transfers.
A country has to deal with other countries in respect of 3 items:-
• Visible items which include all types of physical goods
exported and imported.
• Invisible items which include all those services whose export
and import are not visible. e.g. transport services, medical
services etc.
• Capital transfers which are concerned with capital receipts
and capital payment.

Definition-
• According to Kindle Berger, "The balance of payments of a
country is a systematic record of all economic transactions
between the residents of the reporting country and residents
of foreign countries during a given period of time".

Features
• It is a systematic record of all economic transactions between
one country and the rest of the world.
• It includes all transactions, visible as well as invisible.
• It relates to a period of time. Generally, it is an annual
statement.
• It adopts a double-entry book-keeping system. It has two
sides: credit side and debit side. Receipts are recorded on the
credit side and payments on the debit side.

Components of BOP
1. Current Account Balance
• BOP on current account is a statement of actual
receipts and payments in short period.
• It includes the value of export and imports of both
visible and invisible goods. There can be either
surplus or deficit in current account.
• The current account includes:- export & import of
services, interests, profits, dividends and unilateral
receipts/payments from/to abroad.

2. Capital Account Balance
• It is difference between the receipts and payments on
account of capital account. It refers to all financial
transactions.
• The capital account involves inflows and outflows
relating to investments, short term borrowings/lending,
and medium term to long term borrowing/lending.
• There can be surplus or deficit in capital account.
• It includes: - private foreign loan flow, movement in
banking capital, official capital transactions, reserves,
gold movement etc.

3. Overall BOP -:
Total of a country’s current and capital account is
reflected in overall Balance of payments. It includes
errors and omissions and official reserve transactions.
The errors may be due to statistical discrepancies &
omission may be due to certain transactions may not
be recorded.
For e.g.: A remittance by an Indian working abroad to
India may not yet recorded, or a payment of dividend
abroad by an MNC operating in India may not yet
recorded or so on.
The errors and omissions amount equals to the amount
necessary to balance both the sides

Causes of Disequilibrium
1. Natural causes – e.g. floods, earthquake etc.
2. Economic causes – e.g. Cyclical Fluctuations, Inflation,
Demonstration Effect etc.
3. Political causes – e.g. international relation, political
instability, etc.
4. Social factors – e.g. change in taste and preferences etc.

How to correct the Balance of Payment?
1. Monetary measures –
• Deflation - Deflation means falling prices. Deflation has been
used as a measure to correct deficit disequilibrium. A country
faces deficit when its imports exceeds exports.
• Deflation is brought through monetary measures like bank
rate policy, open market operations, etc. or through fiscal
measures like higher taxation, reduction in public
expenditure, etc.
• Deflation would make our items cheaper in foreign market
resulting a rise in our exports. At the same time the demands
for imports fall due to higher taxation and reduced income.
• This would build a favourable atmosphere in the balance of
payment position. However Deflation can be successful when
the exchange rate remains fixed.

• Exchange Depreciation - Exchange depreciation means
decline in the rate of exchange of domestic currency in
terms of foreign currency. This device implies that a
country has adopted a flexible exchange rate policy.
• Suppose the rate of exchange between Indian rupee
and US dollar is $1 = Rs. 40. If India experiences an
adverse balance of payments with regard to U.S.A, the
Indian demand for US dollar will rise.
• The price of dollar in terms of rupee will rise. Hence,
dollar will appreciate in external value and rupee will
depreciate in external value. The new rate of exchange
may be say $1 = Rs. 50. This means 25% exchange
depreciation of the Indian currency.
• Exchange depreciation will stimulate exports and
reduce imports because exports will become cheaper
and imports costlier. Hence, a favourable balance of
payments would emerge to pay off the deficit.

• Devaluation - Devaluation refers to deliberate attempt
made by monetary authorities to bring down the value
of home currency against foreign currency.
• When devaluation is effected, the value of home
currency goes down against foreign currency, Let us
suppose the exchange rate remains $1 = Rs. 10 before
devaluation. Let us suppose, devaluation takes place
which reduces the value of home currency and now the
exchange rate becomes $1 = Rs. 20.
• After such a change our goods becomes cheap in foreign
market. This is because, after devaluation, dollar is
exchanged for more Indian currencies which push up the
demand for exports. At the same time, imports become
costlier as Indians have to pay more currencies to obtain
one dollar. Thus demand for imports is reduced.
• Generally devaluation is resorted to where there is
serious adverse balance of payment problem.

2. Non-Monetary Measures –
• Export Promotion –
• The government can adopt export promotion measures to
correct disequilibrium in the balance of payments. This
includes substitutes, tax concessions to exporters, marketing
facilities, credit and incentives to exporters, etc.
• The government may also help to promote export through
exhibition, trade fairs; conducting marketing research & by
providing the required administrative and diplomatic help to
tap the potential markets

• Quotas –
• Under the quota system, the government may fix and
permit the maximum quantity or value of a commodity
to be imported during a given period. By restricting
imports through the quota system, the deficit is reduced
and the balance of payments position is improved.
• Tariffs –
• Tariffs are duties (taxes) imposed on imports. When
tariffs are imposed, the prices of imports would increase
to the extent of tariff. The increased prices will reduced
the demand for imported goods and at the same time
induce domestic producers to produce more of import
substitutes. Non-essential imports can be drastically
reduced by imposing a very high rate of tariff.

How to correct the Balance of Payment?
1. Monetary measures –
• Deflation
• Exchange Depreciation
• Devaluation
2. Non-Monetary Measures –
• Export Promotion
• Quotas
• Tariffs

Balance of Trade
• The difference between a country's imports and its
exports. Balance of trade is the largest component of a
country's balance of payments.
• Debit items include imports, foreign aid, domestic
spending abroad and domestic investments abroad.
• Credit items include exports, foreign spending in the
domestic economy and foreign investments in the
domestic economy.
• When exports are greater than imports than the BOT is
favourable and if imports are greater than exports then it
is unfavourable

BOP vs. BOT
• BOP
1. It is a broad term.
2. It includes all transactions related
to visible, invisible and capital
transfers.
3. It is always balances itself.
4. BOP = Current Account + Capital
Account + or - Balancing item (
Errors and omissions)
5. Following are main factors
which affect BOP
a) Conditions of foreign lenders.
b) Economic policy of Govt.
c) all the factors of BOT
• BOT
1. It is a narrow term.
2. It includes only visible items.
3. It can be favourable or unfavourable.
4. BOT = Net Earning on
Export - Net payment for imports.
5. Following are main factors
which affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at
home

• Every 6th person in the world is an Indian and every 3rd
poor person in the world is also an Indian.
• With Increase in the number of unemployed persons,
Poverty expands.
• The problems of unemployment and poverty is Very High
which demands an immediate solution.
• Till 5th Five Year Plan, no serious efforts were taken to
solve the unemployment problem.
• It was assumed that the gains of economic growth would
percolate downwards and the inequalities would decline
and problems of poverty and unemployment would get
solved automatically.
Introduction to Unemployment

• But after the Fifth Five Year Plan, removal of
unemployment became as one of the important
Objectives of economic planning in all five year plans.
• In less developed countries economic growth generally
benefits the elite groups and, as a result, economic
Inequality grow.
• India is facing the same problem of Inequalities.
Cont:-

What is Unemployment?
• A person who is not gainfully employed in
any productive activity is called as
unemployed and collectively it is called as
Unemployment.

Voluntary
Unemployment
Frictional
Unemployment
Casual
unemployment
Seasonal
unemployment
Structural
Unemployment
Technological
unemployment
Cyclical
unemployment
Disguised
unemployment
Chronic
unemployment

Voluntary Unemployment
• There are some people who are unwilling work at the
prevailing wage rate, or
• There are some people who get a continuous flow income
from their property or other sources and need not work.
Voluntary Unemployment is a National waste of human energy.

Frictional Unemployment
• Temporary phenomenon.
• Results when some workers are temporarily out of work
while changing jobs.
• Also result when the work is suspended due to strikes or
lockouts.
• Frictional unemployment is caused by imperfect mobility
of labour.

Casual Unemployment
• Here workers are employed on a day to day basis.
• In generally exist in Construction, catering or agriculture
industries.
• It occurs due to short-term contracts, which are terminable
any time.

Chronic Unemployment
• When unemployment tends to be a long- term feature of a
country it is called chronic unemployment.
• Underdeveloped countries suffer from chronic
unemployment on account of :-
– vicious circle of poverty
– lack of developed resources and their under utilization
– high population growth
– backward & even primitive state of technology
– low capital formation, etc.

Seasonal Unemployment
• Industries such as agriculture, the catering trade, trade in
holiday resorts, some agro-based activities like sugar mills
and rice mills, provide jobs of seasonal nature which are
for certain period.
• People engaged in such type of work or activities may
remain unemployed during the off-season.
• So it is Seasonal Unemployment.

Disguised Unemployment
• When some workers have zero marginal productivity so
that their removal will not affect the volume of total
output.
• Disguised unemployment implies underemployment of
labour.
• This kind of unemployment is a common feature of under
developed economies especially of their rural sector.
• In short, overcrowding in an occupation leads to disguised
unemployment.

• Suppose, a family farm is properly organized
and 4 persons are working on it. If, however, 2
more workers are employed on it and there is
no change in output, we may say that these 2
workers are Disguisedly Unemployed.
Cont:-

Structural Unemployment
• Due to structural changes in the economy, Structural
Unemployment may result.
• Caused by:-
1)decline in demand,
2)disinvestment,
3)reduction in its manpower requirement.
• In fact, structural unemployment is a natural concomitant
of economic progress and innovation in a complex
industrial economy of modern times.

Cyclical Unemployment
• Capitalist biased, advanced countries are subject to trade
cycles.
• Trade cycles are especially recessionary and depressionary
phases causing cyclical unemployment in these countries.
• During the contraction phase of a trade cycle in an
economy, aggregate demand falls and this leads to
disinvestment, decline in production and rise in
unemployment.
The solution for cyclical unemployment lies in measures for increasing
total expenditure in the economy, thereby pushing up the level of
effective demand. Easy policy and fiscal measures such as Deficit
Financing may help.

Technological Unemployment
 Due to the introduction of new machinery, improvement
in methods of production, labour-saving devices, etc.,
some workers tend to be replaced by machines.
 Their unemployment is termed as technological
unemployment.

Unemployment
Urban
Industrial
Unemployment
Educated
Unemployment
Rural
Seasonal
Unemployment
Disguised
Unemployment

 Most of the unemployment in India is definitely structural, that
is, the structure of the economy is such that it does not absorb
an increasing number of people coming to labour market in
search of jobs.
 Industrial Unemployment results when industrial sector fails to
absorb the increasing labour force.
 Also, Cyclical Unemployment is the result of Industrial Recession
in urban areas.
 Educated Unemployment results when a large number of
educated people remain unabsorbed.
 It is estimated that over 1/3rd of India's work force is
Disguisedly Unemployed.
Cont:-

• Usual Status: This measure estimates the number of persons
who may be said to be chronically unemployed. This measure
generally gives the lowest estimate of unemployment especially
for a poor economy because only a few can afford to remain
without work over a long period.
• Current Weekly Status (CWS): This estimate reduces the
reference period i.e. the period for which data is collected to one
week. According to this estimate a person is said to be employed
for the week even if he is employed only for a day during that
week.
• Current Daily Status (CDS): The reference period here is a day.
It counts every half day's activity status of the respondent over
the week.
Ways to measure Unemployment

Causes of Unemployment
• Jobless Growth.
• Increase in Labour Force.
• Inappropriate Technology.
• Inappropriate Educational System.

What is Poverty?
• Poverty is hunger.
• Poverty is lack of shelter.
• Poverty is being sick and not
being able to see a doctor.
• Poverty is not having access to
school and not knowing how to
read.
• Poverty is not having a job, is fear
for the future, living one day at a
time.
• Poverty is losing a child to illness
brought about by unclean water.
• Poverty is powerlessness, lack of
representation and freedom.

Effects on Children
• According to UNICEF, 22,000 children die each day due to poverty.
• Around 27-28 % of all children in developing countries are estimated to
be underweight or stunted.
• For the 1.9 billion children from the developing world, there are:
– 640 million without adequate shelter (1 in 3)
– 400 million with no access to safe water (1 in 5)
– 270 million with no access to health services (1 in 7)
• Worldwide,
– 10.6 million died in 2003 before they reached the age of 5 (same as
children population in France, Germany, Greece and Italy)

Effects on Women
• Women make up half of the world's population and yet represent a
staggering 70% of the world's poor.
• Of the 500,000 women who die in childbirth every year, 99% live in
developing countries. In other words, in developing countries, a girl or a
woman dies every minute in giving birth.
Improper Sanitation
• Of the around six billion people in the world, at least 1.2 billion do not
have access to safe drinking water
• More than 2.4 billion people do not have proper sanitation facilities, and
more than 2,2 million people die each year from diseases caused by
polluted water and filthy sanitation conditions.

Effects on Education
• Based on enrollment data, about 72 million children of
primary school age in the developing world were not in school
in 2005; 57 per cent of them were girls. And these are regarded
as optimistic numbers.
• Nearly a billion people entered the 21st century unable to read
a book or sign their names.
• 121 million out of education worldwide.

Poverty in India
• Despite the growth and development of the Indian economy during the last couple
of decades, poverty is, parallel, increasing in absolute terms.
• The bare fact is that nearly 27.5 % of India’s population still lives below the
poverty line, and 75 % of this, lives in rural areas.
• A recent report laments that 77 % of Indians live on a daily income of Rs.20 only.

(Rural)
• About two thirds of India’s more than 1 billion people live in rural areas, and
almost 170 million of them are poor.
• Although many rural people are migrating to cities, 3 out of 4 of India’s poor
people live in the vast rural parts of the country.
• Poverty is deepest among scheduled castes and tribes in the country’s rural areas.
India’s poorest people include 50 % of members of scheduled tribes and 40 % of
people in scheduled castes.
• On the map of poverty in rural India, the poorest areas lie in parts of Rajasthan,
Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, Orissa and West
Bengal.
• In these areas shortages of water and recurrent droughts impede the transformation
of agriculture that the Green Revolution has achieved elsewhere.

Causes of Rural Poverty
Rapid Population Growth
• With 1,250,000,000 (1.25 billion) people, India is currently the
world's second largest country.
• From the total population of India 68.84% people live in rural area
of India and are growing very fast if we see the statistics of past few
decades.
Lack of Capital
• People basically depend on farming and agriculture in the rural areas
but due to lack of sufficient capital they are not able to do their
farming activities and earn, so they become poor and go below
poverty line.

Lack of literacy
• Many children living in rural areas receive a level of education which is very poor.
Overall enrollment in primary and middle schools are very low.
• 50 % of children living in these areas leave school before the fifth grade.
• These children leave school for variety of reasons: some leave because of lack of
interest; most leave so that they can work in the fields, where the hours are long and
the pay is low.
• A large percent of the dropouts are females. Forced by their parents, most girls perform
chores and tend the family at home.
• These are some of the reasons why 60% of all females in India are illiterate, a figure
much higher than those of males. As these children grow into adults, many are still
illiterate by the age of forty

Large Families
• Generally in rural areas there is large number of people living in one
family. This happens because of two reasons.
• First there is a lack of proper family planning in the rural areas among the
villagers, which increases the population.
• Secondly the people in the rural areas believe in living in one single
families rather than living in nuclear families. This increases the burden of
number of people to be fed in the house and also increases the expenses.
Lack of Alternate Employment Opportunities Other than Agriculture
• The villagers in the rural areas have no alternative solutions to earn their
livelihood accept farming as very few job opportunities are their in the
villages and even if there are any job opportunities except farming the
money available is not good.

Government’s Initiatives
For Employment
• Jawahar Gram Samriddhi Yojana (JGSY) (Formerly known as Jawahar Rozgar
Yojana)
• Training rural youth for self employment TRYSEM Scheme
• Sampurna Gramin Rozgar Yojana
• National Rural Employment Guarantee Scheme
For Family Planning
• Family Planning / Welfare Program for Population Control
For Farmers Insurance
• Group Life Insurance Scheme for Rural Areas
• Agriculture Income Insurance Scheme

For Housing
• Rural Housing Program
For Development
• Small Farmer Development Program (SFDP)
• Drought Area Development
• Pradhan Mantri Gramodaya Yojana (PMGY)
• Swarna Jayanti Gram Swarozgar Yojana
• Integrated Rural Development Program

(Urban)
• As per the latest NSSO survey reports there are over 80
million poor people living in the cities and towns of India. The
Slum population is also increasing and as per TCPO estimates
2001; over 61.80 million people were living in slums.
• The bulk of the urban poor are living in extremely deprived
conditions with insufficient physical amenities like :
– Low-cost water supply,
– Improper sanitation,
– Bad Sewerage and drainage system,
– Very less social services relating to health care, nutrition, pre-school
and non-formal education.

• With over 575 million people, India will have 41% of its
population living in cities and towns by 2030 of its nearly 1
billion inhabitants, an estimated 260.3 million are below the
poverty line, of which 193.2 million are in the rural areas and
67.1 million are in urban areas.
• The poverty level is below 10% in states like Delhi, Goa, and
Punjab etc whereas it is below 50% in Bihar (43) and Orissa
(47). It is between 30-40% in Northeastern states of Assam,
Tripura, and Mehgalaya and in Southern states of TamilNadu
and Uttar Pradesh.

Causes of Urban Poverty
Slow job growth
• Increasing Urban population (currently around 38 crore)
• Severe competition.
• Those who use to get jobs or promotions easily now have to struggle more due to
the population hike in the cities.
Migration of Rural Youth towards Cities
• Majority of rural area depends on agriculture (which is highly dependant on rain
patterns)
• Inadequate rain fall and improper irrigation facilities these days.
• Low or no production of crops which leads to severe poverty among rural
population.
• Urban poverty also increases due to migration of people from rural areas to cities

Government’s Initiative
For Employment
• Nehru Rozgar Yojana (NRY)
• Self – Employment Program for the Urban Poor (SEPUP)
• Prime Minister’s Rozgar Yojana (Also implemented in rural areas)
• Swarna Jayanti Shahri Rozgar Yojana
• Self – Employment to the Educated Urban Youth (SEEUY) Program
For Housing
• Financial assistance for Constructing Houses
Other Programmes
• Urban Basic Services for the Poor (UBSP) Program
• Prime Minister’s Integrated Urban Poverty Eradication Program
(PMIUPEP)

Meaning of inflation
• In economics, inflation is a rise in the general
level of prices of goods and services in an
economy over a period of time. When the
general price level rises, each unit of currency
buys fewer goods and services.

Definitions of inflation
• According to Webster's “An increase in the
amount of currency in circulation, resulting in a
relatively sharp and sudden fall in its value and
rise in prices: it may be caused by an increase in
the volume of paper money issued or of gold
mined, or a relative increase in expenditures as
when the supply of goods fails to meet the
demand.”
• According to Prof. Samuelson “inflation occurs
when general level of prices & cost are rising”.

Causes of Inflation
• Two Shifts
– An increase in demand ( a shift in the demand
curve to the right)
– A decrease in supply (a shift of the supply curve to
the left)
Quantity
Price
($)
S
D
Qe
Pe
D1
Q1
P1
Quantity
Price
($)
S
Qe
Pe
D
S1
Q1
P1

Causes of Inflation
• Any inflation that results from an increase in
demand is called demand-pull inflation
• This is commonly described as "too much
money chasing too few goods"
• Caused by
– Increased Incomes
– Decreased income taxes
– Increased optimism about the future
– Decreased tendency to save
– Consumers expect prices to rise in the future
– More money in the economy

Demand Pull Factors
• Mounting Govt. Expenditure
– Govt. expenditure steadily and continuously increasing
over the years.
– Total expenditure (Both central and state govt.) increased
from Rs. 740 crore (1950-51) to nearly Rs. 6,55,850 crore
(2000-01).
– India is predominantly agricultural economy, therefore big
programs of economic development involves huge
investment.
– Annual rate of investment is increased (Rs. 1000 crores in
1950’s to Rs. 30,000 crores during 10th five year plan in
2002-07).
– Mounting govt. expenditure implies a growing public
demand for goods and services and consequently it will
result in rise in prices.

Contd..
• Deficit Financing and Increase in Money Supply
– While revenue deficit has been rising in recent years,
fiscal deficit has been rising at a much faster rate.
– Method of financing the fiscal deficit- through
borrowing from the market at higher rates.
– An important factor of any spectacular rise in prices is
the expansion in money supply.
– Without monetary expansion, inflation cannot be
sustained n all for any length of time.

Contd..
• Role of Black Money
– There is a large accumulation of unaccounted money in the hands of
income tax evaders, smugglers, builders, corrupt politicians and
corrupt govt. servants.
– It is estimated that Rs. 6,00,000 crore of black money was there in
1997-98.
– Some reports claim a total exceeding US$12.4 trillion are stashed in
Switzerland as of now.
• Uncontrolled growth in population
– For the persistent gap between demand and supply, is due to
continually rising population.
– In almost all goods and services, due to the rise in population, it
exerts continuous pressure on prices.

Causes of inflation
• Any inflation that results from a
decrease in supply is called cost-push inflation.
• Cost-push inflation basically means that prices
have been "pushed up" by increases in costs of any
of the four factors of production (labour, capital,
land or entrepreneurship).
Caused by
– Increased costs of raw materials
– Increased Wages
– Failure to replace capital goods as they age, reducing its
productivity, or increasing its maintenance costs
– Falling Productivity of workers

Cost Push Factors
• Fluctuations in output and supply
– The production of food grains was 89 million tonnes in
1964-65, declined sharply to 72 million in 1965-66
(20% decrease).
– In fiscal year ending June 2011, with a normal
monsoon season, Indian agriculture accomplished an
all-time record production of 85.9 million tonnes of
wheat, a 6.4% increase from a year earlier. Rice
output in India also hit a new record at 95.3 million
tonnes, a 7% increase from the year earlier.
– With decrease in production in output of food grains,
prices will increase.

(Area in million hectares and production in million tonnes)
Crops
Sowing October 10 Production Percentage Change
Normal
Full
Season
2013 2014 2013-14 2014-15*
Sowing
2014 (col
4/col 3)
Productio
n 2014-15
(col 6/col
5)
1 2 3 4 5 6 7 8
Foodgrains 70.6 68.2 66.5 128.7 123.8 -2.5 -3.8
Rice 39.1 37.6 38 91.5 89.6 1.1 -2.1
Coarse Cereals 20.8 19.6 18.2 31.2 28.7 -7.1 -8.0
Maize 7.2 8.2 7.8 17.1 16.5 -4.9 -3.5
Pulses 10.8 10.9 10.2 6 5.5 -6.4 -8.3
Tur 3.8 3.9 3.6 3.2 2.8 -7.7 -12.5
Urad 2.3 2.4 2.5 1.2 1.2 4.2 0.0
Oilseeds 18.3 19.5 17.8 22.6 20.1 -8.7 -11.1
Groundnut 4.6 4.3 3.7 8.1 5.6 -14 -30.9
Soyabean 10 12.2 11 11.9 11.6 -9.8 -2.5
Sugarcane 4.7 5 4.9 352.1 355 -2 0.8
Cotton# 11 11.4 12.7 35.9 35.2 11.4 -1.9
Jute & Mesta## 0.9 0.8 0.8 11.7 11.5 0 -1.7
All Crops 105.5 105.0 102.7 - - -2.2 -
#: Million bales of 170 kgs each. ##: Million bales of 180 kgs each. -: Not Available.
*: Second Advance Estimates.
Source: Ministry of Agriculture, GoI.

Contd..
• Taxation as a factor in rising costs
– Cost push factors consist mainly rise in wages, profit
margins etc.
– With every budget govt. impose fresh taxes, both direct
and indirect.
– With increased indirect tax, traders have the opportunity
to raise prices.
• Hike in oil prices and global inflation
– There are some serious inflationary pressures when oil
prices increases.
– Due to unrest, wars and OPEC regulations, prices of crude
oil changes.
– The current prices are very low ($45.54) therefore it is
helping to curb inflation.
– In Oct. 2014, crude oil prices was more than $94 per barrel

Consequences of Inflation
• Adverse effect on production
– Inflation led to recession in the Indian economy.
– With increased prices, demand of goods decline.
– When demand decline, production will decline.
• Adverse effect on distribution of Income
– Producers, traders and speculators have gained
enormously through ever rising prices (profit margins)
and illegal gains due to black marketeering.
– People living in past savings, pensioners etc. have
been ruined due to continuous depreciation of
purchasing power of a rupee.

Introduction :
• The emphasis on growth was based on the assumption that its
benefits will automatically “trickle down” to poor and
marginalized people.
• The global HDR has created and developed four main
composite human development indices to assess measurable
dimensions of human development.
1. Human development index (HDI),
2. The human poverty index (HPI),
3. The gender-related development index (GDI) and
4. The gender empowerment measure (GEM)

Indicators of economic development

Origin of HDI:
• The index was developed in 1990 by Pakistani
economist Mahbub ul Haq and Sir Richard
Jolly, with help from Gustav Ranis of Yale
University and Lord Meghnad Desai of the
London School of Economics

What is HDI ???
167
• The HDI combines normalized measures of life
expectancy, literacy, educational attainment, and GDP
per capita for countries worldwide.
• It is claimed as a standard means of measuring
human development—a concept that, according to the
United Nations Development Program (UNDP),
refers to the process of widening the options of
persons, giving them greater opportunities for
education, health care, income, employment, etc.
• The basic use of HDI is to measure a country's
development.

The HDI combines three basic
dimensions
168
• Life expectancy at birth, as an index of population
health and longevity.
• Knowledge and education, as measured by the adult
literacy rate (with two-thirds weighting) and the
combined primary, secondary, and tertiary gross
enrollment ratio (with one-third weighting).
• Standard of living, as measured by the natural
logarithm of gross domestic product (GDP) per capita
at purchasing power parity (PPP) in United States
dollars.

Calculation of HDI
To construct the index, fixed minimum and
maximum values have been established for
each of these indicators:
• Life expectancy at birth: 25 years and 85 years
• Adult literacy rate: 0 & 100 %
• Combined gross enrolment ratio: 0% & 100 %
• Real GDP per capita (PPP$): $100 & $40,000
(PPP$)

• Individual indices can be computed according to
the general formula:
• Index = Actual xi value – minimum xi value/
Maximum xi value – minimum xi value
For eg: the life expectancy at birth in a country is
63.7 years the index of life expectancy for the
country would be:
Life expectancy index = 63.7-25/85-25 = 40/60 =
0.645

• The adult literacy rate is 61.0%.
Adult literacy index =61.0-0/100-0=0.61
• Combined gross enrolment ratio is 63.8%
Combined gross enrolment index
=63.8-0/100-0=0.638
• Education index=2/3(0.61)+1/3(0.638)=0.62
Real GDP is 3452,then adjusted GDP
=log(3452)-log(100)/log(40000)-log(100)=0.591
• Therefore HDI for India= (0.645+0.62+0.591)/3
=0.619

Categories of HDI:
High Human Development Index – HDI 0.800 and above
Medium Human Development Index – HDI 0.500 to 0.799
Low Human Development Index – HDI below 0.500

Limitations of HDI:
 Not a comprehensive measure of human development. It
only focuses on three dimensions of capabilities.
 The HDI is not designed to assess progress in human
development over a short-term period because two of its
component indicators—adult literacy and life expectancy at
birth—are not responsive to short-term policy changes.
 Like any average country measure, the HDI does not
account for variations in human development within the
country.
 Countries with the same HDI may be very different in how
human development is distributed, either from region to
region, or from social group to social group.

RURAL AREA
Where the people are engaged in primary industry in the sense that
they produce things directly for the first time in cooperation with
nature.
Rural areas are separately settled places away from the influence of
large cities and towns.
Such areas are distinct from more intensively settled urban and sub-
urban areas, and also from unsettled lands or wilderness, such as
forest.
Rural areas can have an agricultural character, though many rural
areas are characterized by an economy based on cottage industry,
mining, oil and gas exploration, or tourism.

RURAL COMMUNITY
A group of people with a common characteristic or
interest living together, in a village.
A Rural Community can be classified as rural based on
the criteria of lower population density, less social
differentiation, less social and spatial mobility, slow rate
of social change, etc.
Agriculture is the major occupation of rural people.

MAIN FEATURES OF RURAL COMMUNITY
Village is an institution-
The Village is a primary institution. The development of villages is influenced
considerably by the life of the village. It satisfies almost all the needs of the
rural.
Community-
They have a sense of unity and a feeling of belongingness towards each other.
Religion-
Faith in religion and universal power is found in the life of the villages.
Agriculture-
Main occupation is agriculture which involves dependence on nature. Nature
gives the livelihood to them. Farmers worship forces of nature.

Lifestyles in rural areas are different than those in urban
areas, mainly because limited services are available.
Governmental services like law enforcement, schools,
fire departments, and libraries may be distant, limited in
scope, or unavailable.
Utilities like water, sewer, street lighting, and garbage
collection may not be present.
Public transport is sometimes absent or very limited,
people use their own vehicles, walk or ride an animal.

RURAL DEVELOPMENT
Rural development is a strategy
designed to improve the economic
and social life of rural poor.
It is a process, which aims at
improving the well being and self
realization of people living outside
the urbanized areas through
collective process.
Rural Development is all about
bringing change among rural
community from the traditional
way of living to progressive way of
living. It is also expressed as a
movement for progress.

The United Nations defines
Rural Development as:
“Rural Development is a process of change, by which the efforts
of the people themselves are united, those of government
authorities to improve their economic, social and cultural
conditions of communities in to the life of the nation and to
enable them to contribute fully to national programme.”

DEV. IN RURAL AREA CAN BRING
INFA-
STRUCTURE
TECHNO
LOGY
HEALTHEDUCATION
ECONOMY

OBJECTIVES OF RURAL DEV.
1. To develop farm, home, public service and village
community.
2. To bring improvement in producing of crops and animals
living condition.
3. To improve health and education condition etc.
improvement of the rural people.
4. To improve villagers with their own efforts.
5. To improve village communication.

Main Objectives
To generate
Employment Farm & storage Economical activities
To improve
Health Education Living condition
To build
Infrastructure Public Service Communication

PROBLEMS IN RURAL DEVELOPMENT
1. People related
2. Agricultural related problems
3. Infrastructure related problems
4. Economic problems
5. Social and Cultural problems
6. Leadership related problems
7. Administrative problems

PEOPLE RELATED PROBLEMS
1. Traditional way of thinking.
2. Poor understanding.
3. Low level of education to
understand developmental efforts
and new technology.
4. Deprived psychology and
scientific orientation.
5. Lack of confidence.
6. Poor awareness.
7. Low level of education.
8. Existence of unfelt needs.
9. Personal ego.

AGRICULTURE RELATED PROB.
1. Lack of expected awareness,
knowledge, skill and attitude.
2. Unavailability of inputs.
3. Poor marketing facility.
4. Insufficient extension staff and
services.
5. Multidimensional tasks to
extension personnel.
6. Small size of land holding.
7. Division of land.
8. Unwillingness to work and stay
in rural areas.

INFASTRUCTRAL RELATED PROB.
Poor infrastructure facilities like-:
1. Water
2. Electricity
3. Transport
4. Educational institutions
5. Communication
6. Health
7. Employment
8. Storage facility etc.

ECONOMIC PROBLEMS
1. Unfavourable economic condition to adopt high cost
technology.
2. High cost of inputs.
3. Under privileged rural industries

LEADERSHIP RELATED PROBLEM
1. Leadership among the hands of inactive and incompetent
people.
2. Self interest of leaders.
3. Biased political will

ADMINISTRATIVE PROBLEMS
1. Political interference.
2. Lack of motivation and interest.
3. Unwillingness to work in villages.
4. Improper utilization of budget.
5. No proper monitoring of programs.
and lack in their implementation.

Importance of Rural Development
Rural development is a dynamic process, which is mainly
concerned with the rural areas. These include-
Agricultural growth, putting up of economic and social
infrastructure, fair wages as also housing and house sites for
the landless, village planning, public health, education and
functional literacy, communication etc.
Rural development is a national necessity and has
considerable importance in India

Rural development is needed because-:
1. To develop rural area as whole in terms of culture, society, economy,
technology and health.
2. To develop living standard of rural mass.
3. To develop rural youths, children and women.
4. To develop and empower human resource of rural area in terms of their
psychology, skill, knowledge, attitude and other abilities.
5. To solve the problems faced by the rural mass for their development.
6. To develop infrastructure facility of rural area.
7. To provide minimum facility to rural mass in terms of drinking water,
education, transport, electricity and communication.
8. To develop rural institutions like Panchayat, cooperatives, post, banking
and credit.
9. To develop rural industries through the development of handicrafts,
small scaled industries, village industries, rural crafts, cottage industries
and other related economic operations in the rural sector.
10. To develop agriculture, animal husbandry and other agricultural related
areas.

Contd..
11. To restore uncultivated land, provide irrigation facilities and
motivate farmers to adopt improved seed, fertilizers, package of
practices of crop cultivation and soil conservation methods.
12. To develop entertainment and recreational facility for rural
mass.
13. To develop leadership quality of rural area.
14. To improve rural marketing facility.
15. To minimise gap between the urban and rural in terms of
facilities availed.
16. To improve rural people’s participation in the development of
state and nation as whole.
17. To improve scopes of employment for rural mass.
18. For the sustainable development of rural area.
19. To eliminate rural poverty.
20. To empower them.

Business Environment- Unit II- UPTU

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