Economy Terms for UPSC -Part II
INDEX OF INDUSTRIAL PRODUCTION
- Index of Industrial Production (IIP) is an index that shows the performance of different industrial sectors of the Indian economy.
- The IIP is estimated and published on a monthly basis by the Central Statistical Organisation (CSO).
- As an all India index, it gives general level of industrial activity in the economy.
- In the case of Index of Industrial Production India, IIP data is compiled and published by CSO every month. CSO or Central Statistical Organisation operates under the Ministry of Statistics and Programme Implementation (MoSPI).
- According to the CSO. “It is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period.”
- The IIP is used by public agencies including the Government agencies/ departments including that in the Ministry of Finance, the Reserve Bank of India etc. for policy purposes.
- The all-India IIP data is used for estimation of Gross Value Added of Manufacturing sector on quarterly basis.
- The modification made by the CSO is to bring a new base year of 2011-12. Besides the new base year, different sectors have been amended based on National Industrial Classification (NIC), 2008.
- National Industrial Classification (NIC) is an indigenized version of the International Standard Industrial Classification (ISIC) developed by the United Nations Statistics Division (UNSD).
- Electricity, crude oil, coal, cement, steel, refinery products, natural gas, and fertilisers are the eight core industries that comprise about 40 percent of the weight of items included in the Index of Industrial Production. Mining, manufacturing, and electricity are the three broad sectors in which IIP constituents fall.
- The current base year is 2017-2018.
- While the IIP is a monthly indicator, the Annual Survey of Industries (ASI) is the prime source of long-term industrial statistics.
- The ASI is used to track the health of the industrial activity in the economy over a longer period.
- The index is compiled out of a much larger sample of industries compared to IIP.
INDEX OF EIGHT CORE INDUSTRIES (ICI)
- The monthly Index of Eight Core Industries (ICI) is a production volume index.
- ICI measures collective and individual performance of production in selected eight core industries viz. Coal, Crude Oil, Natural Gas, Petroleum Refinery Products, Fertilizers, Steel, Cement and Electricity.
- Lead indicator of monthly industrial production of 8 core sectors represents 40.27% of IIP – Prepared by MoC&I – Weightage breakup in descending order: Refinary products > Electricity > Steel > Coal > Crude oil > Natural Gas > Cement > Fertilizers
- The objective of the ICI is to provide an advance indication on production performance of industries of ‘core’ nature before the release of Index of Industrial Production (IIP) by Central Statistics Office. These industries are likely to impact on general economic activities as well as industrial activities.
- The Index is compiled and released by Office of the Economic Adviser (OEA), Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry, Government of India.
HINDU RATE OF GROWTH
- The term ‘secular’ rate of growth (which connotes long term trend growth) is well established in literature of development economics. (It is also used in the sense of a religious belief, practice and process of the State).
- In distinctive contrast, ‘Hindu’ rate of growth was coined to refer to the phenomenon of sluggishness in growth rate of Indian economy (3.5 per cent observed persistently during 1950s through 1980s).
- The term, which owes to Professor Raj Krishna, Member, Planning Commission, captured popular imagination and was used synonymously to describe inadequacy of India’s growth performance.
- However, of late, the term has lost its relevance and appeal as economic reforms and liberalization in India since 1990s manifested in tripling of growth rate of Indian economy from this paltry level.
- In general, reflects the rate of change in prices of all goods and services in an economy over a period of time.
- Every country has its own set of commodity basket to track inflation.
- While some countries use Wholesale Price Index (WPI) as their official measure of inflation and some others use the Consumer Price Index (CPI).
- The International Monetary Fund (IMF) statistics reveals that, while 24 countries use WPI as the official measure to track inflation, 157 countries use CPI. Conceptually these two measures of inflation stress different stages of price realization as well as composition: while WPI measures the change in price level at wholesale market, CPI measures the change in price level at retail level.
- In India, headline inflation is measured through the WPI (the latest base year 2011-12) – which consists of 697 commodities (services are not included in WPI in India).
- It is measured on year-on-yearbasis i.e., rate of change in price level in a given month vis a vis corresponding month of last year. This is also known as point-to-point inflation.
- In India, there are three main components in WPI – Primary Articles (weight: 22.62%), Fuel & Power (weight: 13.15%) and Manufactured Products (weight: 64.23). Within WPI, Food Inflation is also calculated on year-on-year basis.
- Apart from WPI, CPI is also computed to capture inflation in India. In particular, four categories of CPI are computed – for Industrial Workers (CPI-IW), Urban Non-Manual Employees (CPI-UNME), Agricultural Labourers (CPI-AL) and Rural Labourers (CPI-RL). However, WPI is considered as the preferred measure of headline inflation due to its wider coverage.
- A situation of extremely rapid inflation (reaching 100% per year or more), often resulting from a condition of economic or political breakdown.
- When associated with depressions, hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money.
- Left unchecked this causes prices to increase, as the currency loses its value.
- When associated with wars, hyperinflation often occurs when there is a loss of confidence in a currency’s ability to maintain its value in the aftermath.
- Because of this, sellers demand a risk premium to accept the currency, and they do this by raising their prices.
INCREMENTAL CAPITAL-OUTPUT RATIO
- It is the ratio of investment to growth.
- The higher the incremental capital-output ratio, the lesser the productivity of capital, and the lower the incremental capital-output ratio is equal to the higher productivity of capital.
- Capital output ratio is the amount of capital needed to produce one unit of output.
- ICOR indicates the additional unit of capital or investment needed to produce an additional unit of output.
- An inferior good is a type of good whose demand declines when income rises.
- In other words, demand of inferior goods is inversely related to the income of the consumer.
- For example, there are two commodities in the economy — wheat flour and jowar flour — and consumers are consuming both.
- Presently both commodities face a downward sloping graph, i.e. the higher the price the lesser will be the demand and vice versa.
- If the income of consumer rises, then he would be more inclined towards wheat flour, which is a little costly than jowar flour.
INFORMAL /UNORGANIZED SECTOR
- In Indian official statistical documentation, there is no mention of informal sector. It is also not being used by the National Accounts Statistics (NAS). In fact, NAS uses organized and unorganized sector.
- However, informal/unorganized sector has a predominant place in the Indian economy in terms of its contribution to the GDP and employment.
- In the survey conducted by NSSO, NSSO defines the informal sector enterprises comprise of all unincorporated proprietary and partnership enterprises.
- However, National Accounts Statistics (NAS) defines the unorganized sector in addition to the unincorporated proprieties or partnership enterprises, includes enterprises run by cooperative societies, trust, private and limited companies.
- The informal sector can therefore, be considered as a sub-set of the unorganized sector.
- However, in a detailed report titled Report on Definitional and Statistical Issues Relating to the Informal Economy was submitted in 2008 in which the Commission has recommended that the Informal Sector be defined as “The unorganized sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than ten total workers”.
- The unorganised sector refers to those enterprises whose activities or collection of data is not regulated under any legal provision or do not maintain any regular accounts.
- For instance, the units that are not registered under the Factories Act, 1948 form the unorganised composition of the manufacturing sector.
- Organised sector is the sector which comprises enterprises regarding which statistics are available from the budget documents or reports etc.
INFLATION INDEXED BOND (IIB)
- A bond issued by the Sovereign, which provides the investor a constant return irrespective of the level of inflation in the economy.
- The main objective of Inflation Indexed Bonds is to provide a hedge and to safeguard the investor against macroeconomic risks in an economy.
- Issue of IIBs has assumed significance in the context of high level of inflation experienced in the Emerging Market and Developing Economies during the recent years, as the value of money loses rapidly in an environment of high inflation.
- The issue of Inflation Indexed bonds in advanced economies is limited on account of low inflation experienced in these economies.
‘INFRASTRUCTURE INVESTMENT TRUSTS’
- An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return. InvITs work like mutual funds or real estate investment trusts (REITs) in features.
- InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
- Sebi notified the Sebi (Infrastructure Investment Trusts) Regulations, 2014 on September 26, 2014, providing for registration and regulation of InvITs in India.
- The objective of InvITs is to facilitate investment in the infrastructure sector.
- InvITS are like mutual funds in structure. InvITs can be established as a trust and registered with Sebi. An InvIT consists of four elements: 1) Trustee, 2) Sponsor(s), 3) Investment Manager and 4) Project Manager.
- LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate for unsecured short-term borrowing in the interbank market.
- It acts as a benchmark for short-term interest rates.
- It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages.
- It is an indicator of the health of the financial system and provides an idea of the trajectory of impending policy rates of central banks.
- LIBOR is administered by the Intercontinental Exchange or ICE. It is computed for five currencies with seven different maturities ranging from overnight to a year.
- The five currencies for which LIBOR is computed are Swiss franc, euro, pound sterling, Japanese yen and US dollar. ICE benchmark administration consists of 11 to 18 banks that contribute for each currency.
- The rates received from the banks are arranged in descending order and the top and bottom quartiles are excluded to remove outliers.
INVERTED DUTY STRUCTURE (IDS)
- Inverted duty structure (IDS) is a situation where the rate of tax on inputs used is higher than the rate of tax on the finished good.
- The term ‘Inverted Tax Structure’ refers to a situation where the GST rate on inputs purchased (or inward supplies) is more than the GST rate on finished goods (or outward supplies).
KISAN CREDIT CARD
- A pioneering credit delivery innovation for providing adequate and timely credit to farmers under single window.
- It is a flexible and simplified procedure, adopting whole farm approach, including short-term, medium-term and long-term credit needs of borrowers for agriculture and allied activities and a reasonable component for consumption needs.
- Credit card and pass book or credit card cum pass book provided to eligible farmers facilitate revolving cash credit facility. Any number of drawals and repayments within a limit, which is fixed on the basis of operational land holding, cropping pattern and scale of finance can be made.
- Each drawal has to be repaid within a maximum period of 12 months and the Card is valid for 3 to 5 years subject to annual review. Conversion/reschedulement of loans is permissible in case of damage to crops due to natural calamities.
- Crop loans disbursed under KCC Scheme for notified crops are covered under Rashtriya Krishi Bima Yojana (National Crop Insurance Scheme), to protect farmers against loss of crop yield caused by natural calamities, pest attacks etc.
- Kisan Credit Card (KCC) Scheme, which enables the farmers to purchase agricultural inputs such as seeds, fertilizers, pesticides, etc. and to draw cash to satisfy their consumption needs has since been simplified and converted into an ATM enabled debit card (Rupay KCC- RKCC).
- In order to extend the operational flexibility to farmers engaged in Animal Husbandry and Fisheries the Government of India decided to extend the facilities of KCC to these farmers in the Budget 2018-19.
KISAN VIKAS PATRA (KVP)
- A saving instrument launched by the Government for individual savers, wherein invested money doubled during the maturity period.
- This savings scheme was first launched by the Government on 1 April, 1988 and was distributed through post offices.
- It was discontinued in 2011 and later reintroduced in 2014.
- KVP is considered a part of the National Small Savings Fund. (for details on the accounting of the funds thus collected, please see the write up on National Small Savings Fund).
- In Hindi, Kisan stands for farmers, Vikas for development and Patra for certificate.
- However, as the name might suggest, this is not a scheme intended only for farmers nor is the raised money used only for farmers’ development.
- In fact, the Scheme does not distinguish between rural or urban investors. Rather, it had an urban bias.
- Further, the money raised through KVP is invested in central and state government securities, thus financing the respective Governments indirectly.
- In KVP, a single holder type certificate was issued to an adult for himself or on behalf of a minor, or jointly to two adults. When introduced initially, it was available in denominations of INR. 100/-, 500/-, 1000/-, 5000/-, 10,000/-, in all Post Offices and INR. 50,000/- in all Head Post Offices.
- Further, there was no limit on investment under KVP. In addition, it was easily transferrable like a bearer instrument. It had longer maturity than a term deposit and had higher interest rate than a government security of a comparable maturity.
- The maturity period of the scheme, when launched, was 5 ½ years and the money invested doubled on maturity.
- However, KVP is not a tax saving instrument as it does not offer any income tax exemption.
LAND BANK SYSTEM
- Launched by Commerce and Industry Ministry for six States based on which land can be identified for setting up industries.
- Developed by the Integration of Industrial Information System (IIS) with state GIS (Geographic Information System).
- IIS portal is a GIS-enabled database of industrial clusters/areas across the states.
- Industrial parks across 31 states/UTs covering about 4,75,000 hectares of land have also been mapped out on the system.
- System will include drainage, forest; raw material heat maps (horticulture, agricultural, mineral layers); multilayer of connectivity.
LIQUIDITY ADJUSTMENT FACILITY (LAF)
- It is a monetary policy instrument used by the RBI for managing the liquidity needs of the commercial banking system.
- The LAF works through various instruments devised by the RBI to inject liquidity into the banking system when the system/institutions need cash as well as to absorb liquidity when the banking system has excess money.
- The components of LAF are:
- Repo (overnight fixed repo or the ‘popular’ repo)
- Reverse Repo (Overnight fixed reverse repo or the ‘popular reverse repo’)
- Term repo (auction)
- Overnight variable rate repo (auction)
- Overnight variable rate reverse repo (auction)
- An asset is said to be liquid if it is easy to sell or convert into cash without any loss in its value. By definition, bank notes and checking accounts are the most liquid assets.
- A liquid asset allows any individual or a company to access cash at any time they want.
- At the time of investing, the investor must keep some of the liquid assets in his portfolio so that he can have an easy hand on his money during an emergency.
- Cash is a highly liquid asset followed by the banking accounts, checkable account, short-term promissory notes, treasury bills and other government bonds.
- Liquidity trap is a situation when expansionary monetary policy (increase in money supply) does not increase the interest rate, income and hence does not stimulate economic growth.
- Liquidity trap is the extreme effect of monetary policy.
- It is a situation in which the general public is prepared to hold on to whatever amount of money is supplied, at a given rate of interest.
- They do so because of the fear of adverse events like deflation, war.
- In that case, a monetary policy carried out through open market operations has no effect on either the interest rate, or the level of income.
- In a liquidity trap, the monetary policy is powerless to affect the interest rate.
- There is a liquidity trap at short term zero percent interest rate. When interest rate is zero, public would not want to hold any bond, since money, which also pays zero percent interest, has the advantage of being usable in transactions.
- Hence, if the interest is zero, an increase in quantity of money cannot not induce anyone to buy bonds and thereby reduce the interest on bonds below zero.
‘MARGINAL STANDING FACILITY’
- Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.
- Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short.
- The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
- Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).
MARKET STABILISATION SCHEME (MSS) BONDS
- These are special bonds floated on behalf of the government by the RBI for the specific purpose of mop ping up the excess liquidity in the system when regular government bonds prove inadequate.
- These are mostly shorter-tenure bonds, of less than six months maturity.
- But the tenure differs depending on the requirement.
- The sudden surge in deposits due to the surrender of demonetized currency notes in large quantities skews bond yields and interest rates, disrupting the functioning of the market.
- To impound the excess liquidity, bankers felt MSS bonds were a better option than a hike in CRR holdings.
- Market capitalization is the aggregate valuation of the company based on its current share price and the total number of outstanding stocks.
- It is calculated by multiplying the current market price of the company’s share with the total outstanding shares of the company.
- Market capitalization is one of the most important characteristics that helps the investor determine the returns and the risk in the share.
- It also helps the investors choose the stock that can meet their risk and diversification criterion.
- Rupee denominated bond issued by an Indian entity in foreign markets
- exchange rate risk falls on investors, not affect issuers
- high interest rate (2-3% than LIBOR) = benefits investors — helps in rupee internationalisation
- first issued by world bank backed IFC
- 3 years minimum tenure
- can be issued by any corporate or body corporate in India
- can be purchased by any investor from FATF complaint jurisdiction outside India.
- MIBOR is the acronym for Mumbai Interbank Offer Rate, the yardstick of the Indian call money market.
- It is the rate at which banks borrow unsecured funds from one another in the interbank market.
- At present, it is used as a reference rate for floating rate notes, corporate debentures, term deposits, interest rate swaps and forward rate agreements.
- The pricing of overnight indexed swaps, a type of overnight interest rate swap used for hedging interest rate risk is based on overnight MIBOR.
- Based on the recommendation of the Committee for the Development of Debt Market, the National Stock Exchange (NSE) launched the Mumbai Interbank Offer Rate (MIBOR) and Mumbai Interbank Bid Rate (MIBID) in June, 1998.
MINIMUM ALTERNATE TAX (MAT)
- Alternative minimum tax imposed on book profit of companies – Why? Companies had substantial book profits but paid no tax – Applies to zero tax companies, foreign companies with income source in India, and companies with normal tax less than MAT – Exemptions (Infrastructure companies, power companies, venture capital investments, income from charitable activities, income from free trade zones).
MINIMUM SUPPORT PRICE (MSP)
- Guaranteed price for the farmers’ produce – announced at beginning of sowing season
- 22 crops covered (14 kharif, 6 Rabi, 2 commercial)
- announced by govt on recommendations of CACP (under MoA)
- CACP suggestion not binding – CACP is statutory body –
- MSP objectives (insure agricultural producers against sharp price fall, prevent distress sales & procure food grains for public distribution).
MULTIDIMENSIONAL POVERTY INDEX
- Launched by the UNDP and the Oxford Poverty & Human Development Initiative (OPHI) in 2010.
- Basic philosophy and significance of MPI is that it is based on the idea that poverty is not unidimensional (not just depends on income and one individual may lack several basic needs like education, health etc.), rather it is multidimensional.
- The MPI measures overlapping deprivations at the household level across the same three dimensions as the Human Development Index (health, education and living standards).
- The index shows the proportion of poor people and the average number of deprivations each poor person experiences at the same time.
- What is the methodology of MPI?
- The Multidimensional Poverty Index (MPI) identifies multiple deprivations and that is why the index is known as multidimensional.
- Methodological significance of MPI is that it recognizes poverty from different dimensions compared to the conventional methodology that measures poverty only from the income or monetary terms.
- For the estimation of deprivation or poverty from different dimensions, the MPI uses three dimensions and ten indicators. The three dimensions are health, education and standard of living. Deprivations are measured for the household and individual levels. The household data are aggregated to derive the national measure of multidimensional poverty. The three dimensions and ten indicators based on them are:
- The dimensions and the respective indicators used are:
- Education: Years of schooling and child enrollment (1/6 weightage each, total 2/6);
- Health: Child mortality and nutrition (1/6 weightage each, total 2/6);
- Standard of living: Electricity, flooring, drinking water, sanitation, cooking fuel and assets (1/18 weightage each, total 2/6)
‘MUMBAI INTERBANK BID RATE (MIBID)’
- MIBID or Mumbai Interbank Bid Rate is the rate of interest that a bank would be willing to pay to secure a deposit from another bank in the Indian interbank market.
- The MIBID rate is the weighted average of all interest rates that the participating banks offer on deposits on a particular day. It is calculated by the National Stock Exchange (NSE).
- When banks offer loans to customers, they charge interest on them.
- Similarly, when a bank offers a short-time loan to another bank or to any other financial institution, it charges interest on that loan.
- This rate varies from bank to bank, depending on their policies.
- However, it is essentially benchmarked to the MIBID value.
- Municipal bonds are bonds issued by urban local bodies- municipal bodies and municipal corporates (entities owned by municipal bodies) to raise money for financing specific projects specifically infrastructure projects.
- These bonds are attracting attention as the ULBs urgently need money to finance infrastructural expenditure.
- Especially, smart cities and other urban development projects necessitates them to create finance.
- Municipal bonds are there in India from 1997 onwards. Bangalore Municipal Corporation was the first ULB to issue Municipal Bond in India in 1997.
- Municipal bonds in India have tax-free status if they conform to certain rules and their interest rates will be market-linked. Both pubic issue and private issue can be adopted for municipal bonds.
- Municipal bonds where the funds raised are kept for one project are termed revenue bonds. Servicing of these bonds can be made from revenue accrued from the project.
NATIONAL PAYMENTS CORPORATION OF INDIA (NPCI)
- National Payments Corporation of India (NPCI), the umbrella organisation for Retail Payment Systems (RPSs) in the country, has emerged as a System Wide Important Payment System (SWIPS) because of the significant volume of transactions processed in the payment systems operated by it.
- Reserve Bank of India (RBI) undertakes onsite and/or offsite supervision of RPSs like PPI issuers, ATM networks, TReDS platforms, MTSS operators, card networks, etc.
- Financial Market Infrastructures (FMI) are regulated by Reserve Bank of India
NEGATIVE YIELD BOND
- A negative bond yield is a bond whose maturity price is lower than the purchase price. In this case, as the bond’s issue price is higher than the price the bond buyer is getting at its maturity, there is the negative yield.
- Negative yield bond can generally happen in two ways.
- Bond yields of the currently traded bond are negative.
- Central banks are issuing new bonds that have low maturity price compared to its issue price.
NEGOTIATED DEALING SYSTEM
- Most trading platforms have now migrated to electronic mode. This has occurred in the trading of Government securities (G-Secs) as well.
- The G-Secs are issued in the primary market and traded in the secondary market electronically.
- For this, the RBI has created the Negotiated Dealing System (NDS) as an electronic platform in 2002 for dealing in government securities.
- Securities of the Central Government -both bonds and treasury bills and the State Development Loans are auctioned using the NDS platform.
- The NDS facilitates members to submit bids for government securities electronically. These bids for the purchase of government securities can be made when the RBI conduct auctions for them.
- The auction process take place in the primary market using the NDS platform. Participants are primary dealers, commercial banks etc.
‘NET INTEREST INCOME (NII)’
- Net interest income (NII) is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors.
- Net interest income can differ from bank to bank due to variations in the composition and quality of assets and interest-bearing funds, change in yields of interest-earning assets and in interest rates paid on liabilities. NIIs of lenders with assets and liabilities bearing variable rates are more vulnerable to change in interest rates.
- If the spread between rate-sensitive assets (RSAs) and rate-sensitive liabilities (RSLs) increases, a rise in interest rate can make interest income rise more than interest expenses.
- In such a case, NII also goes up.
- On the other hand, when the spread between RSAs and RSLs falls, a rise in interest rate can make interest expenses rise more than interest income, leading to a drop in NII.
- NII, meanwhile, can also get impacted by any rise or fall in non-performing assets (NPAs).
‘NET NATIONAL INCOME’
- Net National Income is Gross National Income or Gross National Product less depreciation.
- Gross National Product (GNP) is Gross Domestic Product (GDP) plus net factor income from abroad.
- It measures the monetary value of all the finished goods and services produced by the country’s factors of production irrespective of their location.
- Only the finished or final goods are considered as factoring intermediate goods used for manufacturing would amount to double counting.
- It includes taxes but does not include subsidies. When depreciation is deducted from the GNP, we get Net National Income.
NET INTEREST MARGIN OR NIM
- Net interest margin or NIM denotes the difference between the interest income earned and the interest paid by a bank or financial institution relative to its interest-earning assets like cash.
- Thanks to its frequent usage, it’s become a part of the banking and financial lexicon.
- For a bank, if the non-performing assets (NPAs) are rising, the interest earned would fall and the NIM will decline. In case the demand for savings increases relative to the demand for loans, the NIM will fall.
- Meanwhile, a higher NIM would increase the profitability of the lender. A negative NIM indicates that the lender has been unable to make good use of its assets, as returns produced by investments has failed to offset interest expenses.
NOMINAL EFFECTIVE EXCHANGE RATE (NEER)
- The nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one country’s currency exchanges for a basket of multiple foreign currencies i.e. It is the value of basket of foreign currencies in terms of Indian rupee.
- If NEER value is high then other country currency could buy more of Indian products then exports would increase.
- In economics, the NEER is an indicator of a country’s international competitiveness.
- Non-tax revenue is charged against services provided by the government.
- It also includes interest charged on loans advanced by the government for various purposes.
- Note that it is compulsory to pay a part of the income earned/generated and amount of goods and services consumed as tax.
- However, non-tax revenue becomes payable only when services offered by the government are availed.
- Source: Interest, Dividends and profits, Petroleum license, Power supply fees, Fees for Communication Services, Broadcasting fees, Road, Bridges usage fees, Examination fees, Fee for police services, Sale of stationery, gazettes etc, Fee for Administrative Services, Receipts relating to Defence Services,
- Sources of State Govt.: Police services
- Home guards
- Administrative services
- Municipal services
- Jobs through state public services boards
- Sale of stationery
NON-TARIFF BARRIERS TO TRADE (NTBS)
- Sometimes called “Non-Tariff Measures (NTMs)” are trade barriers
- restrict imports or exports of goods or services through mechanisms other than the simple imposition of tariffs.
- may take the form of import quotas, subsidies, customs delays, technical barriers, or other systems preventing or impeding trade.
- According to the World Trade Organization, non-tariff barriers to trade include import licensing, rules for valuation of goods at customs, pre-shipment inspections, rules of origin (‘made in’), and trade prepared investment measures.
- A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
- Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
- Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
NON- AGRICULTURAL MARKET ACCESS (NAMA)
- NAMA refers to the trade liberalisation rules about major non-agricultural goods under WTO.
- It covers laws for trading of items like manufacturing and other industrial goods, mining, jewellery, forestry etc.
- The NAMA discussions are stalled after 2008 after differences of opinion between the emerging economies and developed countries.
- Developed countries demand higher level of tariff cutting commitments on NAMA products.
- Since the cutting of tariff require higher reduction by the developing countries who have the higher tariff rates now, progress on NAMA has been halted.
- The objective of NAMA is to reduce or as appropriate eliminate tariffs, including the reduction or elimination of high tariffs, tariff peaks and tariff escalation as well as Non-Tariff Barriers, in particular on products of export interest to developing countries.
- Operation twist is a monetary policy intervention by the central bank, conducted through Open Market Operations (OMOs), where the central bank is buying long term bonds of the government and at the same time selling short term securities of the government.
- Buying long term securities and selling short term securities will reduce the yield of long term securities compared to that of the short term ones.
- This yield impact is the objective of Operation Twist.
OPEN MARKET SALE SCHEME (OMSS)
- Refers to selling of foodgrains by Government / Government agencies at predetermined prices in the open market from time to time to enhance the supply of grains especially during the lean season and thereby to moderate the general open market prices especially in the deficit regions.
- In addition to maintaining buffer stocks and making a provision for meeting the requirement of the Targeted Public Distribution Scheme and Other Welfare Schemes (OWS), Food Corporation of India (FCI) on the instructions from the Government, sells wheat and rice in the open market from time to time to enhance the supply of wheat and rice especially during the lean season and to moderate the open market prices especially in the deficit regions.
- For transparency in operations, the Corporation has switched over to e- auction for sale under Open Market Sale Scheme (Domestic).
- Participatory Notes (P-Notes) are instruments used by foreign funds and investors not registered with the SEBI to invest in Indian securities.
- They are generally issued overseas by associates of India based foreign brokerages (FPIs) and domestic institutional investors.
- Technically, P-Notes are Offshore Derivative Instruments (ODIs) issued by FPIs and their subaccounts against underlying Indian securities (like shares).
- A payments bank is like any other bank, but operating on a smaller scale without involving any credit risk. In simple words, it can carry out most banking operations but can’t advance loans or issue credit cards. It can accept demand deposits (up to Rs 1 lakh), offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third party fund transfers.
- In September 2013, the Reserve Bank of India constituted a committee headed by Dr Nachiket Mor to study ‘Comprehensive financial services for small businesses and low income households’. The objective of the committee was to propose measures for achieving financial inclusion and increased access to financial services.
- Why payments banks? The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, migrant labour workforce in secured technology-driven environment.
- With payments banks, RBI seeks to increase the penetration level of financial services to the remote areas of the country.
- Existing prepaid payment instruments (PPI model) like Airtel Money does not give pay any interest on deposits.
PEER TO PEER LENDING
- According to the RBI guidelines, ‘Peer to Peer Lending Platform means an intermediary providing the services of loan facilitation via online medium or otherwise, to the participants.’ Participants are persons who has entered into an arrangement with an NBFCP2P to lend on it or to avail of loan facilitation services provided by it.
- The P2P lending is carried out through the internet platforms of the P2P lending companies. These companies charge a small commission for their services. Most of the loans are unsecured (no collateral) small personal loans.
PERIODIC LABOUR FORCE SURVEY (PLFS)
- But from 1st April 2017, the NSSO has adopted a new employment and unemployment survey called Periodic Labour Force Survey (PLFS).
- First report of the PLFS was published in June 2019 for the period of 2017-18.
- The PLFS has now become the major employment and unemployment data of the NSSO; replacing the previous five-year surveys.
- Results of the PLFS will be brought out in the form of an Annual Key Report, which would contain detailed tables for both rural and urban sectors.
- Annual estimates(for both rural and urban areas) would be generated for major parameters like:
- Labour Force Participation Rate (LFPR),
- Worker Population Ratio (WPR).
- Unemployment Rate (UR),
- Distribution of workers by industry, occupation, workers employed in informal sector and
- Conditions of employment of the workers.
- Annual estimates(for both rural and urban areas) would be generated for major parameters like:
- Poverty trap is a spiraling mechanism which forces people to remain poor.
- It is so binding in itself that it doesn’t allow the poor people to escape it. Poverty trap generally happens in developing and under-developing countries, and is caused by a lack of capital and credit to people.
- Poverty trap can be broken by planned investments in the economy and providing people the means to earn and be employed.
- A series of poverty alleviation programs can be enforced to raise individuals out of poverty by providing monetary aid for a period of time.
- But if the plan fails, people will become dependent on such programs forever and may even go deeper down in the poverty spiral.
- However, poorer countries find this to be difficult, leading to the over-exploitation of natural resources and land.
- The transfer of ownership, property or business from the government to the private sector is termed privatization.
- The government ceases to be the owner of the entity or business.
- The process in which a publicly-traded company is taken over by a few people is also called privatization.
- The stock of the company is no longer traded in the stock market and the general public is barred from holding stake in such a company.
- The company gives up the name ‘limited’ and starts using ‘private limited’ in its last name.
- Privatization is considered to bring more efficiency and objectivity to the company, something that a government company is not concerned about.
- India went for privatization in the historic reforms budget of 1991, also known as ‘New Economic Policy or LPG policy’.
- Primary Deficit is the difference between the current year’s fiscal deficit and the interest paid on the borrowings of the previous year.
- Primary Deficit indicates the borrowing requirements of the government, excluding interest.
- It is the amount by which the total expenditure of a government exceeds the total income.
- Note that primary deficit does not include the interest payments made.
- Also, primary deficit shows the borrowing requirements needed for meeting the expenditure of the government.
- Normally, when the government raises a loan, it includes the interest amount.
- When that amount is deducted from the principal loan amount, that is the primary deficit.
- In simpler terms, the government’s borrowings excluding the interest payment is the primary deficit.
- Primary Deficit is the difference between fiscal deficit and interest payments.
- To calculate Primary Deficit, you also need the help of fiscal deficit. Fiscal deficit is the difference between the total expenditure of the government and its total income.
- When the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.
- Progressive tax is the one where the tax rate increases with the taxpayer’s income.
- The correct interpretation is that the tax liability for a taxpayer increases with his income in terms of proportion of income and in absolute amount.
- Tax burden of the taxpayer also goes up when the tax is progressive.
- Proportional tax is the taxing mechanism in which the taxing authority charges the same rate of tax from each taxpayer, irrespective of income.
- This means that lower class, or middle class, or upper-class people pay the same amount of tax.
- Since the tax is charged at a flat rate for everyone, whether earning higher income or lower income, it is also called flat tax.
- Proportional tax is based on the theory that since everybody is equal, taxes should also be charged the same way.
‘PURCHASING POWER PARITY’
- The theory aims to determine the adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other.
- In other words, the expenditure on a similar commodity must be same in both currencies when accounted for exchange rate.
- The purchasing power of each currency is determined in the process.
- Purchasing power parity is used worldwide to compare the income levels in different countries. PPP thus makes it easy to understand and interpret the data of each country.
QUALIFIED FOREIGN INVESTOR (QFI)
- sub-category of Foreign Portfolio Investor and refers to any foreign individuals, groups or associations, or resident, however, restricted to those from a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and a country that is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU).
- QFI scheme was introduced by Government of India in consultation with RBI and SEBI in the year 2011, through a Union Budget announcement.
- The objective of enabling QFIs is to deepen and infuse more foreign funds in the Indian capital market and to reduce market volatility as individuals are considered to be long term investors, as compared to institutional investors.
- QFIs are allowed to make investments in the following instruments by opening a demat account in any of the SEBI approved Qualified Depository Participant (QDP):
- Equity and Debt schemes of Indian mutual funds,
- Equity shares listed on recognized stock exchanges,
- Equity shares offered through public offers
- Corporate bonds listed/to be listed on recognized stock exchanges
- G-Securities, T-Bills and Commercial Papers
- QFIs do not include FIIs/Sub-accounts/ Foreign Venture Capital Investor (FVCI).
- Quantitative easing is an occasionally used monetary policy, which is adopted by the government to increase money supply in the economy in order to further increase lending by commercial banks and spending by consumers.
- The central bank (Read: The Reserve Bank of India) infuses a pre-determined quantity of money into the economy by buying financial assets from commercial banks and private entities.
- This leads to an increase in banks’ reserves.
- Quantitative easing is aimed at maintaining price levels, or inflation.
- However, these policies can backfire heavily, leading to very high levels of inflation. In case commercial banks fail to lend excess reserves, it may lead to an unbalance in the money market.
‘REAL ECONOMIC GROWTH RATE’
- Real Economic Growth Rate is the rate at which a nation’s Gross Domestic product (GDP) changes/grows from one year to another.
- GDP is the market value of all the goods and services produced in a country in a particular time period.
- Real Economic Growth Rate takes into account the effects of inflation.
- Since inflation plays a key role in the GDP of an economy, it is very important to ascertain the effects of inflation on GDP.
- As a result, the Real Economic Growth Rate takes into account the buying power and is inflation-adjusted.
- This is the reason it is considered to be a better measure of growth rate than the nominal growth rate.
REAL EFFECTIVE EXCHANGE RATE (REER)
- The real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies.
- The weights are determined by comparing the relative trade balanceof a country’s currency against each country within the index.
- REER is used to evaluate how a currency is fluctuating against many others at once, and is also used in international trade assessments.
- The REER can be used to measure the equilibrium value of a country’s currency, identify the underlying factors of a country’s trade flow, and analyze the impact that other factors, such as competition and technological changes, have on a country and ultimately the trade-weighted index.
- The Receipt Budget is an extensive document prepared as a part of the Union Budget of India exercise to showcase the break-up of the government’s receipts from various income sources.
- The Receipt Budget is a statement showing the revenue receipts and the capital receipts of the government typically over four time-periods – Actual of the previous-to-previous year, Budget Estimates for the current year and Revised Estimates for the current year, and lastly the Budget Estimates for the next year.
- Revenue receipts of the government
- Corporation Tax
- Income Tax
- Custom Duties
- Union Excise Duties
- GST and taxes of Union territories.
- Recession is a slowdown or a massive contraction in economic activities.
- A significant fall in spending generally leads to a recession.
- Such a slowdown in economic activities may last for some quarters thereby completely hampering the growth of an economy.
- In such a situation, economic indicators such as GDP, corporate profits, employments, etc., fall.
- This creates a mess in the entire economy.
- To tackle the menace, economies generally react by loosening their monetary policies by infusing more money into the system, i.e., by increasing the money supply.
- This is done by reducing the interest rates. Increased spending by the government and decreased taxation are also considered good answers for this problem.
- The recession which hit the globe in 2008 is the most recent example of a recession.
- This is a situation wherein the real GDP is lower than the potential GDP at the full employment level. The economy operates below the full employment level in a recessionary gap.
- Recessionary gap is also termed as contractionary gap. An economy doesn’t necessarily operate at the full employment level. So the difference that exists between the potential full employment equilibrium and the actual ones is the recessionary gap.
- This recessionary gap pushes prices down in the long term. Recession refers to a general slowdown in economic activities, i.e. a business cycle contraction.
- Generally, a recessionary gap occurs when an economy is approaching recession. So, it is also associated with business cycle contraction.
- Under this system of taxation, the tax rate diminishes as the taxable amount increases.
- In other words, there is an inverse relationship between the tax rate and taxable income. The rate of taxation decreases as the income of taxpayers increases.
- This system of taxation generally benefits the higher sections of the society having higher incomes as they need to pay tax at lesser rates.
- On the other hand, people with lesser incomes are burdened with higher rate of taxation.
- In the case of regressive tax, the tax rate decreases with increase in income. Here, the tax liability of the taxpayer decreases with increase in his income. Or in other words, the proportion of his income to be paid as tax decreases with increase in income.
- Regulatory risk is the risk of a change in regulations and law that might affect an industry or a business. Such changes in regulations can make significant changes in the framework of an industry, changes in cost-structure, etc. Every policy, especially the budget, is very closely watched due to this reason. For example: A policy change in the excise duty on rubber from 20% to 30% will lead to an increase in the cost of rubber. Hence, prices will increase in the market.
- A measure of poverty based on an individual or family’s relative income compared to the overall average level of income in the economy as a whole.
- Relative poverty thresholds change over time with growth in overall income levels.
- Distinct from absolute measures of poverty, which are defined according to a specified level of real consumption.
- Also known as Cash Reserve Ratio, it is the percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank.
- The reserve ratio is an important tool of the monetary policy of an economy and plays an essential role in regulating the money supply.
- When the central bank wants to increase money supply in the economy, it lowers the reserve ratio.
- As a result, commercial banks have higher funds to disburse as loans, thereby increasing the money supply in an economy.
- On the other hand, for controlling inflation, the CRR is generally increased, thereby decreasing the lending power of banks, which in turn reduces the money supply in an economy.
REPO LINKED LENDING RATE
- As the name suggests, repo linked lending rate or RLLR is the lending rate which is linked to the RBI’s repo rate.
- However, the effective RLLR interest rate depends on multiple factors.
- For example, the RLLR-linked home loan interest rate will depend on several factors such as what the loan amount is, the loan-to-value of the loan and even the risk group of the borrower, amongst other things.
- There can be a Spread or Margin charged by the bank.
- Every bank will have its own Repo linked lending rate or RLLR which will keep varying each time the Reserve Bank of India or the RBI revises the repo rate. For the uninitiated, repo rate is the rate at which banks borrow from the RBI. The central bank reviews the repo rate on a bi-monthly basis through its Monetary Policy Committee or MPC.
- When banks borrow funds from the RBI, it is at the repo rate. Lowering of repo rate by the RBI makes banks lend at a lower rate. Therefore, in case of lending based on RLLR, the home loan interest rate will move up or down as per the movement in the repo rate.
- MCLR is primarily an internal benchmark of the bank as its own cost of funds will determine the MCLR of the bank.
- However, in the case of RLLR which is externally linked, the bank’s own cost of funds does not have a direct impact when the repo rate goes up or comes down. In the case of RLLR home loans, the interest rate will be linked to the bank’s RLLR.
- This RLLR, in turn, will depend on the RBI’s repo rate. Whenever the RBI revises the repo rate, RLLR of banks gets impacted. Any cut in the repo rate will help banks in lowering RLLR and vice versa. RLLR, therefore, is an external benchmark.
- Revenue Expenditure is that part of government expenditure that does not result in the creation of assets.
- Payment of salaries, wages, pensions, subsidies and interest fall in this category as revenue expenditure examples.
- Also, note that revenue expenses are incurred by the government for its operational needs.
‘REVERSE REPO RATE’
- Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country.
- It is a monetary policy instrument which can be used to control the money supply in the country.
- An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant.
- An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.
- Launched by the Reserve Bank of India (RBI) on 13 June 2016, named as Scheme for Sustainable Structuring of Stressed Assets (S4A Scheme) for addressing the large stressed assets of the corporate sector with banks.
- The S4A Scheme aims at deep financial restructuring of big debted projects by allowing lender (bank) to acquire equity of the stressed project.
- In this context, the scheme makes financial restructuring of large projects at the same time helping the lender’s ability to deal with such stressed assets.
- It is intended to restore the flow of credit to critical sectors including infrastructure.
SMALL FINANCE BANKS (SFBS)
- Aims to provide basic banking services to un-banked and underbanked sections —
- scheduled bank status —
- minimum paid-up equity capital at Rs. 200 cr –
- can accept deposit of any amount –
- can lend but largely (75%) to priority sector including Agri and small business –
- can provide remittance service —
- can issue MF, pension and insurance products —
- Payment Banks can also become SFB —
- SFB can be converted into a full-fledged bank — Eligibility (10 yrs of experience in financial services).
- Soft currency is a currency which is hyper sensitive and fluctuates frequently. Such currencies react very sharply to the political or the economic situation of a country.
- It is also known as weak currency due to its unstable nature. Such currencies mostly exist in developing countries with relatively unstable governments. Soft currencies cause high volatility in exchange rates as well, making them undesirable by foreign exchange dealers. These currencies are the least preferred for international trade or holding reserves.
- Zimbabwean dollar is a classic example of soft currency.
- Seigniorage refers to the profit made by a government from minting currency.
- Seigniorage is determined by the difference between the face value of the currency and the cost of producing it.
- Seigniorage involves the assessment of the profit or loss made on producing a currency.
- In case the Seigniorage is positive, the government makes an economic profit on the production of the currency.
- However, if the Seigniorage is negative, the government makes an economic loss.
- The costs are different for printing notes and for minting coins.
- In the case of coins, the cost will include the cost of the metal used.
- The government generally incurs a loss in the production of coins.
- This is because the melt value together with the production cost is higher than the denomination it represents.
- Seigniorage forms part of the revenue for a government when the worth of the money is more than the cost of producing it.
- The revenue can be used by the governments to finance a portion of their expenditure without the need to collect tax revenues.
- Seigniorage also refers to the number of goods or services a government can acquire by the printing of new notes.
- A government’s profit can also be affected by other factors, such as the need to make interest payments to the Federal Bank (Reserve Bank of India).
SECURED OVERNIGHT FINANCING RATE (SOFR)
- SOFR was selected by the Alternative Reference Rates Committee (ARRC) chaired by the New York Federal Reserve in 2017.
- It is a benchmark interest rate for dollar-denominated derivatives and loans.
- It is based on transactions in the Treasury repurchase market.
- Similar to a mortgage rate, SOFR is a secured borrowing rate in the sense that collateral is provided to borrow cash.
- It is seen as preferable to London interbank offered rate (LIBOR)since it is based on data from observable transactions rather than on estimated borrowing rates.
- A nation is a sovereign entity. Any risk arising on chances of a government failing to make debt repayments or not honouring a loan agreement is a sovereign risk.
- Such practices can be resorted to by a government in times of economic or political uncertainty or even to portray an assertive stance misusing its independence. A government can resort to such practices by easily altering any of its laws, thereby causing adverse losses to investors.
- Sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity. Governments borrows huge funds by issuing debt instruments like government bonds.
- Creditworthiness here means the ability of the government to pay back its debt without default.
- Under sovereign credit rating, the factors considered are mainly the macroeconomic strength of the economy and the fiscal health of the government.
- Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt instruments (like bonds) of a given country, including political risks.
- Sovereign rating is useful to understand the risk of bonds issued by governments across the world.
- Moody’s itself gives the following view of sovereign rating:
- “In the vast majority of the world’s debt capital markets, national governments are the largest borrowers, and their credit standing provides a benchmark for other issuers of debt.”
- It is a tactic used by investors/ traders to hold cash so as to make the best use of any investment opportunity that arises later on.
- Keeping all money invested doesn’t seem attractive all the time. Maintaining a fair amount of liquidity in one’s portfolio is one of the top priorities for an investor. Generally, investors keep a fair amount of such cash with them so as to earn higher profits.
- There may be chances of interest rates going up in future, thereby giving higher returns on investment.
- In such a situation, the cash kept aside by the investor equips him to exploit such an attractive investment opportunity.
- This is known as speculative motive.
SPECIAL AND DIFFERENTIAL TREATMENT
- The WTO (World Trade Organization) Agreements contain provisions which give developing countries special rights under the WTO framework. These rights are called “special and differential treatment” provisions.
- The logic of extending S&DT to the developing countries is that these economies are in a low level of the development phase compared to the developed countries.
- The benefits under the S&DT (special and differential treatment) permits the developing countries to enjoy certain benefits like taking longer time periods (transition period) for implementing agreements and the binding commitments, and measures to increase trading opportunities for them.
- As per the current norm, any WTO member can designate itself as a developing country and avail these benefits. The developing country tag is self-selection. This means a specific country can claim the tag on the basis of its level of development.
- Now, when the entire WTO institutional framework is on a reform mode, revision of the Special and Differential treatment is a major demand of the developed world.
SPECIAL ECONOMIC ZONE (SEZ) SCHEME
- A designated duty-free enclave to be treated as a territory outside the customs territory of India for the purpose of authorized operations in the SEZ;
- No license required for import;
- Manufacturing or service activities allowed;
- The Unit shall achieve Positive Net Foreign Exchange to be calculated cumulatively for a period of five years from the commencement of production;
- Domestic sales subject to full customs duty and import policy in force;
- SEZ units will have freedom for subcontracting;
- No routine examination by customs authorities of export/import cargo;
- SEZ Developers /Co-Developers and Units enjoy tax benefits as prescribed in the SEZs Act, 2005.
- Union Commerce ministry is the nodal agency for administering Special Economic Zones (SEZs)
SPOT EXCHANGE RATE
- A spot exchange rate is the price to exchange one currency for another for delivery on the earliest possible value date.
- Although the spot exchange rate is for delivery on the earliest value date, the standard settlement date for most spot transactions is two business days after the transaction date.
- The spot exchange rate is for a currency between two countries, such as the euro, which is the exchange rate between the U.S. and the eurozone.
- Generally, the spot rate is set by the forex market, but some countries actively set or influence spot exchange rates through mechanisms like a currency peg.
- Spot price refers to the current price of a security at which it can be bought/ sold at a particular place and time.
- Spot prices are most commonly used for serving as a base indicator for pricing future contracts. Based on the spot price of the security, traders/ investors are able to make projections about the future price movements of the security.
- They actually represent the market expectations of the security’s future prices.
- Especially in case of commodity futures contracts, the spot price contributes to ascertain the futures price of the commodity.
‘STATUTORY LIQUIDITY RATIO’
- The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR).
- Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities.
- Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR.
- Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.
STANDING DEPOSIT FACILITY (SDF)
- Standing Deposit Facility allows the RBI to absorb liquidity (deposit) from commercial banks without giving government securities in return to the banks. In the present situation, the main arrangement for the RBI to absorb excess money with the banking system is the famous reverse repo mechanism.
- Under reverse repo (which is a part of the Liquidity Adjustment Facility), banks will get government securities in return when they give excess cash to the RBI. An interest rate of reverse repo rate is also provided to banks.
- The inconvenience with this arrangement is that the RBI has to provide securities every time when banks provide funds.
- As per the stand of the RBI, when the central bank has to absorb tremendous amount of money from the banking system through the reverse repo window, it will become difficult for the RBI to provide such volume of government securities in return.
- This situation was occurred during the time of demonetization.
- In this sense, the Standing Deposit Facility (SDF) is a collateral free arrangement meaning that RBI need not give collateral for liquidity absorption.
- The SDF will allow the RBI to suck out liquidity without offering government securities as collateral.
STUDENTS GUIDE TO MONEY: POCKET MONEY
- Flagship programme of Securities and Exchange Board of India (SEBI) and National Institute of Securities Markets (NISM’s)
- Aimed at increasing financial literacy among school students.
- The objective is to help school students understand the value of money and the importance of saving, investing and financial planning.
- The resource material is available in Hindi and English.
- The leading indicator to measure the size of a government’s tax revenue is the tax-GDP ratio. Actually, the tax-GDP ratio talks about the size of the government’s (central government’s or central plus states- as the case may be) tax revenue expressed as a percentage of the GDP.
- Tax-GDP ratio of the centre and states combined will be near around 16%. Big changes in tax GDP ratio rarely occurs.
- Higher tax-GDP ratio is a happy situation for the government.
- It clearly indicates increased fiscal capacity of the in the budget to finance its expenditure.
- If tax-GDP ratio is higher, it will help the government to reduce its dependence on borrowings.
- India’s tax-GDP ratio is lower compared to the international level.
- At the same time, India’s government expenditure to the public is also lower than the world average. Still, higher tax revenues will help the government to provide more services to the people in the form of welfare schemes.
- The basic principle is that the government should get adequate revenues to finance its expenditure.
- Hence tax-GDP ratio should be enough to meet government expenditure.
TARGETED LONG TERM REPO OPERATION (TLTRO)
- Lets banks borrow funds (1-2 years) from RBI at repo rate by providing g-secs as collateral —
- can get total Rs. 50,000 crore under this
- funds for investment in investment grade bonds, commercial bonds and non-convertible debentures of NBFCs
- at least 50% of fund should be invested in small NBFCs, Mid-sized NBFCs and Micro-financie institutions (MFIs)
- Purpose of the TLTRO is to ensure that there is enough liquidity in markets like corporate market and their yield are not going up in the context of the Covid set back.
- The TLTROs are exempted from regulatory requirement of the cash reserve ratio for the equivalent of incremental credit disbursed by banks as loans. Interest rate under for banks will be floating rates linked to the policy repo rate.
TRADE IN SERVICES (GATS) AGREEMENT
- On services trade, the WTO has the well-known General Agreement on Trade in Services (GATS) Agreement. It is the international code of conduct that provides the rules for promoting international trade in services.
- But several countries especially that those who are members of notable Free Trade Agreements are not happy about the limited trade liberalization envisaged by the GATS. They are designing higher order service trade liberalistion. One such trade arrangement which is under formation level is the Trade in Services Agreement.
- Trade in Services Agreement is a plurilateral services trade liberalization attempt among selected WTO member countries aiming to liberalize services trade beyond what WTO permits.
- When the government is going to the financial market to raise money, it can do it by issuing two types of debt instruments – treasury bills and government bonds.
- Treasury bills are issued when the government need money for a shorter period while bonds are issued when it need debt for more than say five years.
- Treasury bills; generally shortened as T-bills, have a maximum maturity of a 364 days.
- Hence, they are categorized as money market instruments (money market deals with funds with a maturity of less than one year).
- Treasury bills are presently issued in three maturities, namely, 91 day, 182 day and 364 day.
- Treasury bills are zero coupon securities and pay no interest.
- Rather, they are issued at a discount (at a reduced amount) and redeemed (given back money) at the face value at maturity.
- Treasury bills are usually held by financial institutions including banks.
- They have a very important role in the financial market beyond investment instruments. Banks give treasury bills to the RBI to get money under repo. Similarly, they can keep it as part of SLR.
TRADE RELATED INTELLECTUAL PROPERTY RIGHTS (TRIPS) PLUS
- TRIPs Plus are higher level of protection norms demanded by the developed countries that are not prescribed by the WTO’s TRIPs regime. Although they are named as ‘TRIPS-Plus,’ they are not formally related to TRIPs. Rather, the term is used to indicate that these requirements go beyond the minimum standards imposed by TRIPs. Many developing countries who are members of FTAs are under pressure to enact these tougher conditions in their patent laws.
- The developing countries have concerns over the higher level of protection demanded by the developed world. They fear that once such levels of protection are given multilaterally, it will reduce competition and may led to price rise of medicines, affecting health security in poor countries.
- Unemployment trap is a situation when unemployment benefits discourage the unemployed to go to work.
- People find the opportunity cost of going to work too high when one can simply enjoy the benefits by doing nothing.
- While the purpose of social security and welfare systems is to provide relief to the unemployed, they end up providing them with an incentive not to return to work.
- An unemployment trap arises when opportunity cost of going to work is higher than the income received, discouraging people from returning to work and being productive.
UNIFIED PAYMENTS INTERFACE (UPI)
- A payment system launched by National Payments Corporation of India (NPCI)
- It facilitates the fund transfer between two bank accounts through a smartphone.
- It converts multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.
- It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.
- The unique feature of UPI is that it immediate money transfer through mobile devices round the clock 24*7 and 365 days. Also, a single mobile application may be used for accessing different bank accounts.
- It may also be used for Utility Bill Payments, Over the Counter Payments and Barcode (Scan and Pay) based payments.
- Startup companies with a potential to grow need a certain amount of investment.
- Wealthy investors like to invest their capital in such businesses with a long-term growth perspective.
- This capital is known as venture capital and the investors are called venture capitalists.
- Such investments are risky as they are illiquid, but are capable of giving impressive returns if invested in the right venture.
- The returns to the venture capitalists depend upon the growth of the company.
- Venture capitalists have the power to influence major decisions of the companies they are investing in as it is their money at stake.
- Digital currency is a digital representation of money still, not issued by a central bank or a public authority and it need not be tied (equal value) to a fiat currency.
- It can be issued to pay for goods and services on the internet.
- Main feature of digital currency is that it is entirely digital, and it doesn’t have a physical equivalent.
- Still, it acts in the same way as the traditional fiat money. We can receive, transfer and/or exchange digital currency for another currency. There is no assured value by the legal authority that is the central bank.
WAYS AND MEANS ADVANCES (WMAS)
- Temporary loan given by RBI to government (centre/state)
- to meet mismatches in receipts and payments
- limits are periodically decided mutually by govt and RBI
- introduced in 1997
- given at repo rate 4.4%
- govt has to return the amount within 90 days
- in case not returned then it becomes overdraft and govt pays additional 2% interest after 90 days.
WHOLESALE PRICE INDEX, OR WPI,
- The Index measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
- WPI is unlike the Consumer Price Index (CPI), which tracks the prices of goods and services purchased by consumers.
- Analysts use the numbers to track the supply and demand dynamics in industry, manufacturing and construction.
- The numbers are released by the Economic Advisor in the Ministry of Commerce and Industry.
- An upward surge in the WPI print indicates inflationary pressure in the economy and vice versa.
- The quantum of rise in the WPI month-after-month is used to measure the level of wholesale inflation in the economy.
- With an aim to align the index with the base year of other important economic indicators such as GDP and IIP, the base year was updated to 2011-12 from 2004-05 for the new series of Wholesale Price Index (WPI), effective from April 2017.
- Major components of WPI
- Primary articles is a major component of WPI, further subdivided into Food Articles and Non-Food Articles.
- Food Articles include items such as Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc.
- Non-Food Articles include Oil Seeds, Minerals and Crude Petroleum
- The next major basket in WPI is Fuel & Power, which tracks price movements in Petrol, Diesel and LPG
- The biggest basket is Manufactured Goods. It spans across a variety of manufactured products such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals, and more.
- Manufactured Goods basket also includes manufactured food products such as Sugar, Tobacco Products, Vegetable and Animal Oils, and Fats.
WPI FOOD INDEX
- WPI has a sub-index called WPI Food Index, which is a combination of the Food Articles from the Primary Articles basket, and the food products from the Manufactured Products basket.
Economy Terms for UPSC-Part I
Economy Terms for UPSC-Part III
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