Economics

Ghanshyam Thori Economy Notes

Ghanshyam Thori Economy Notes1

EconomicsAnalysis

WTO· Discuss the importance of World Trade Organization (WTO) to Indian economy in the light of various

opportunities & challenges at the global level. (30 Marks)· What is Dumping? Evaluate the remedial measures taken by the Government of India vis-à-vis WTO

provisions regarding dumping? (30 Marks)· Discuss the reasons for the failure of the Seattle Millenium talks on the WTO. Discuss some

implications of this failure on the Indian Economy. (15 Marks)

Various Industrial Sectors - Industrial Policy/Liberalization/Reforms/Disinvestment· What are the reasons for Industrial sickness in India? Suggest suitable remedies. (30 Marks)· State the comprehensive structural reforms undertaken to improve the Indian Economy since 1991. (30

Marks)· India is rapidly emerging as an information technology Superpower. Discuss some aspects of the

growth of this sector in the Indian economy. What role can public policy play in further enhancing thegrowth prospects in this sector? (30 Marks)

· Discuss the role of public sector during the post-reform period of Indian Economy. (15 Marks)· Liberalization of Indian Economy since 1991 has led to excessive consumerism & over production of

white goods. Elucidate. (15 Marks)· Outline the main objectives & achievements of the policy of disinvestment in India. (15 Marks)

Agriculture/Forestry/Environment· Comment on the relationship between credit availability & agricultural growth in India. (30 Marks)· What is the meaning & aim of social forestry? What are the main weaknesses noticed in Social Forestry

Program. (15 Marks)· Bring out the main objectives of Rashtriya Krishi Bima Yojana. The scheme is being implemented by

which agency. (15 Marks)· What are “Minimum Support Prices” in agricultural products? What are their objectives? (15 Marks)· Examine the effect of economic development on environmental degradation in India. (15 Marks)

Finance/Taxes/Monetary Matters/Financial Reforms· Describe the main sources of Industrial Finance in India. How could India benefit from recent

developments in international finance? (30 Marks)· What are the major recommendations of the Task Force on direct taxes appointed under the

chairmanship of Shri Vijay L Kelkar? (30 Marks)· Discuss the economic effects of black money (parallel economy) in Indian Economy. (15 Marks)· Discuss the nature & cause of UTI crisis with particular reference to US-64. How does this UTI fiasco

affect the investment climate in India?. (15 Marks)· What is the role of external financial assistance in the Indian Economy? (15 Marks)· What is a Finance Commission? (15 Marks)· What are the recommendations of the Narsimham committee regarding the banking sector in India. (15

Marks)



· Point out the measures undertaken towards flexibility in capital account transactions during the recentpast. (15 Marks)

· What are the hurdles faced by the Finance Ministers of India in keeping the fiscal deficit below 3-4percent of the GDP? Suggest steps to lower fiscal deficit. (15 Marks)

Poverty· Discuss the causes & ramifications of hunger in Africa. (30 Marks)· How is poverty level measured? Evaluate poverty eradication programs in India. (30 Marks)· What is the incidence of poverty in India? How should poverty alleviation programs be constructed? (30

Marks)· Examine the effects of Globalization on poverty removal in India. (15 Marks)

Planning· Write a note on the strategy of planning in India since 1951. (30 Marks)· Outline the objectives of 10th Five Year Plan(15 Marks)· Main provisions of 9th five year plan (2 Marks)

Population· Outline the main targets fixed in the National Population Policy 2000. What have been the followup

measures to this policy? (30 Marks)· Control over growth of population in India is essential for the country’s rapid economic development.

Discuss. (30 Marks)

Economics – Policies & Schemes – Recent – Current Affairs· The main thrust of Export-Import Policy 2002-07 is on creating a framework for enhancing India’s

export capability. In the light of this statement outline the salient features of EXIM Policy 2002-07.(UPSC 2002) (30 Marks)

· With what objectives was the “Essential Commodities Act 1955” amended last year? (15 Marks)· Explain Mega Food Park Scheme of Government of India. (15 Marks)· What is (Revised) Targeted Public Distribution System? What are its main features? (15 Marks)

Transport:· What ails Indian’s road transport economy? Suggest measures for remedy. (15 Marks)

Miscellaneous:· Indian economy represents a paradox of high savings rate with low income & high savings rate with low

growth rate. Analyse. (30 Marks)· What are the implications of Gender disparities in India? (15 Marks)· Examine the functions of the European Free Trade Association. (15 Marks)



Economic Terms

Twin Deficit Twin deficit means combination of fiscal deficit & current account deficit. Acurrent account deficit shows the extent to which a country is consuming more thanit is producing. The current account is a section in a country’s balance of payments(BOP) that records a country's current transactions. The account is divided intofour sections: goods, services, income (such as salaries and investment income)and unilateral transfers (for example, worker’s remittances).A current account deficit occurs when a country has an excess of one or more ofthe four factors making up the account. When a current transaction enters theaccount, it is recorded as a credit, and when a value leaves the account, it is markedas a debit. Basically, a current account deficit occurs when more money is beingpaid out than brought into a country.

Fiscal Deficit When a government's total expenditures exceed the revenue that it generates(excluding money from borrowings). Deficit differs from debt, which is anaccumulation of yearly deficits. A fiscal deficit is regarded by some as a positiveeconomic event. For example, economist John Maynard Keynes believed thatdeficits help countries climb out of economic recession. On the other hand, fiscalconservatives feel that governments should avoid deficits in favor of a balancedbudget policy.

Phillips Curve An economic concept developed by A. W. Phillips stating that inflation andunemployment have a stable and inverse relationship. The theory states that witheconomic growth comes inflation, which in turn should lead to more jobs and lessunemployment. The concept has been proven empirically and some governmentpolicies are directly influenced by it.

Indifference Curve A diagram depicting equal levels of utility (satisfaction) for a consumer faced withvarious combinations of goods.

As an example, consider the diagram above. This consumer would be mostsatisfied with any combination of products along curve U3. This consumer wouldbe indifferent between combination Qa1, Qb1, and Qa2, Qb2.



Hundi Hundis refer to financial instruments evolved on the Indian sub-continent used intrade and credit transactions.Technically, a Hundi is an unconditional order inwriting made by a person directing another to pay a certain sum of money to aperson named in the order. Hundis, being a part of the informal system have nolegal status and are not covered under the Negotiable Instruments Act, 1881.Though normally regarded as bills of exchange, they were more often used asequivalents of cheques issued by indigenous bankers.

Badla Badla was an indigenous carry-forward system invented on the Bombay StockExchange as a solution to the perpetual lack of liquidity in the secondary market.Under Badla system the share transaction deal could be postponed from onesettlement period (generally a week) to next settlement period by paying financecharges i.e. compensation or badla. Rolling settlement has replaced Badla System.

Laffer Curve Invented by Arthur Laffer, this curve shows the relationship between tax rates andtax revenue collected by governments. The chart below shows the Laffer Curve:

The curve suggests that, as taxes increase from low levels, tax revenue collected bythe government also increases. It also shows that tax rates increasing after a certainpoint (T*) would cause people not to work as hard or not at all, thereby reducingtax revenue. Eventually, if tax rates reached 100% (the far right of the curve), thenall people would choose not to work because everything they earned would go tothe government. Governments would like to be at point T*, because it is the pointat which the government collects maximum amount of tax revenue while peoplecontinue to work hard.

Eurobond Bond issued in a currency other than the currency of the country or market inwhich it is issued. Usually, a eurobond is issued by an international syndicate andcategorized according to the currency in which it is denominated. A eurodollarbond that is denominated in U.S. dollars and issued in Japan by an Australiancompany would be an example of a eurobond. The Australian company in thisexample could issue the eurodollar bond in any country other than theU.S.Eurobonds are attractive financing tools as they give issuers the flexibility tochoose the country in which to offer their bond according to the country'sregulatory constraints. They may also denominate their eurobond in their preferredcurrency. Eurobonds are attractive to investors as they have small par values andhigh liquidity



ADR (AmericanDepositoryReceipt)

A negotiable certificate issued by a U.S. bank representing a specified number ofshares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs aredenominated in U.S. dollars, with the underlying security held by a U.S. financialinstitution overseas. ADRs help to reduce administration and duty costs that wouldotherwise be levied on each transaction.

GDR A bank certificate issued in more than one country for shares in a foreign company.The shares are held by a foreign branch of an international bank. The shares tradeas domestic shares, but are offered for sale globally through the various bankbranches.

Rolling Settlement The process of settling security trades on successive dates so that trades executedtoday will have a settlement date one business day later than trades executedyesterday. This contrasts with account settlement, in which all trades are settledonce in a set period of days, regardless of when the trade took place. Whensecurities are sold and settled on successive business days, they are said to beexperiencing a rolling settlement. E.g. T+2 rolling settlement in India.

ParticipatoryNotes

Financial instruments used by investors or hedge funds that are not registered withthe Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes toforeign investors. Any dividends or capital gains collected from the underlyingsecurities go back to the investors. In many ways, this is similar to an informalADR process, where brokerages hold on to stocks for foreign investors. However,Indian regulators are not very happy about participatory notes because they have noway to know who owns the underlying securities. Regulators fear that hedge fundsacting through participatory notes will cause economic volatility in India'sexchanges

Currency Swap A swap that involves the exchange of principal and interest in one currency for thesame in another currency. For example, suppose a U.S.-based company needs toacquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars.These two companies could arrange to swap currencies by establishing an interestrate, an agreed upon amount and a common maturity date for the exchange.Currency swap maturities are negotiable for at least 10 years, making them a veryflexible method of foreign exchange.

Dalal Street A term that refers to the Bombay Stock Exchange, the major stock exchange inIndia. The street is home not only the Bombay Stock Exchange but also a largenumber of other financial institutions. The term "Dalal Street" is used in the sameway as "Wall Street" in the U.S., referring to the country's major stock exchangesand overall financial system. These terms are often seen in the financial media.

Dow JonesIndustrial Average

The Dow Jones Industrial Average is a price-weighted average of 30 significantstocks traded on the New York Stock Exchange and the Nasdaq. The DJIA wasinvented by Charles Dow back in 1896. Often referred to as "the Dow", the DJIA isthe oldest and single most watched index in the world. The DJIA includescompanies like General Electric, Disney, Exxon and Microsoft. When the TVnetworks say "the market is up today", they are generally referring to the Dow.

Nikkei Short for Japan's Nikkei 225 Stock Average, the leading and most-respected indexof Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to theDow Jones Industrial Average Index in the U.S. In fact, it was called the Nikkei



Dow Jones Stock Average from 1975 to 1985S&P 500 An index consisting of 500 stocks chosen for market size, liquidity and industry

grouping, among other factors. The S&P 500 is designed to be a leading indicatorof U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. The S&P 500 is one of the most commonly used benchmarks for theoverall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at onetime the most renowned index for U.S. stocks, but because the DJIA contains only30 companies, most people agree that the S&P 500 is a better representation of theU.S. market. In fact, many consider it to be the definition of the market.

DAX An index of 30 top German Stocks.Hang Seng An index of the leading stocks on the Hong Kong stock market.FTSE The FTSE is similar to Standard & Poor's in the United States. They are best

known for the FTSE 100, an index of blue-chip stocks on the London StockExchange

NYSE CompositeIndex

Measures all common stocks listed on the New York Stock Exchange and foursubgroup indexes: industrial, transportation, utility and finance. The index tracksthe change in the market value of NYSE common stocks, and is adjusted toeliminate the effects of new listings and delistings. The market value of each stockis calculated by multiplying its price per share by the number of shares listed.

NASDAQ National Association of Security Dealers Automated Quotation. This is an index ofNew York Stock Exchange which determines the behaviour of IT & IT relatedindustries. Created in 1971, the Nasdaq was the world's first electronic stockmarket. The term "Nasdaq" used to be capitalized "NASDAQ" as an acronym forNational Association of Securities Dealers Automated Quotation. In recent times,the acronym was dropped, and Nasdaq is now used as a proper noun. The Nasdaqis traditionally home to many high-tech stocks. The big ones include Microsoft,Intel, Dell and Cisco.

S&P CNX Nifty orNifty

A stock index endorsed by Standard & Poor's and composed of 50 of the largestand most liquid stocks found on the National Stock Exchange (NSE) of India. It iscommonly used to represent the market for benchmarking Indian investments.Similar to other major stock indexes like the S&P 500, companies must meetcertain requirements in terms of market capitalization and liquidity before they canbe considered for inclusion in the index. Also known as "Nifty 50". CNX stands for the Credit Rating Information Services of India Limited (CRISIL)and the National Stock Exchange of India (NSE). These two bodies own andmanage the index within a joint venture called the India Index Services andProducts Ltd. (IISL). Without the additional abbreviation to S&P CNX, the indexname would be S&P CRISIL NSE Index. As of July 2007, the stocks in the S&PCNX Nifty represented well over 50% of the total market capitalization of allstocks in India's stock exchanges.

Sensex An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - thebenchmark index of the Bombay Stock Exchange (BSE). It is composed of 30 ofthe largest and most actively-traded stocks on the BSE. Initially compiled in 1986,the Sensex is the oldest stock index in India.

CNX Nifty Junior The next rung of liquid securities after S&P CNX Nifty is the CNX Nifty Junior. Itmay be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as makingup the 100 most liquid stocks in India.



CNX 100 100 most liquid stocks on NSE. It can be said as the combination of S&P CNXNifty & CNX Nifty Junior.

S&P CNX 500 The S&P CNX 500 is India’s first broad-based benchmark of the Indian capitalmarket for comparing portfolio returns vis-a-vis market returns. The S&P CNX500 represents about 90.30% of total market capitalization and about 80.02% of thetotal turnover on the NSE as on March 30, 2007.

S&P CNX Defty Almost every institutional investor and off-shore fund enterprise with an equityexposure in India would like to have an instrument for measuring returns on theirequity investment in dollar terms. To facilitate this, a new index the S&P CNXDefty-Dollar Denominated S&P CNX Nifty has been developed. S&P CNX Deftyis S&P CNX Nifty, measured in dollars.

Currency Forward A forward contract in the forex market that locks in the price at which an entity canbuy or sell a currency on a future date. Also known as "outright forward currencytransaction", "forward outright" or "FX forward".In currency forward contracts, thecontract holders are obligated to buy or sell the currency at a specified price, at aspecified quantity and on a specified future date. These contracts cannot betransferred.

IPO The first sale of stock by a private company to the public. IPOs are often issued bysmaller, younger companies seeking capital to expand, but can also be done bylarge privately-owned companies looking to become publicly traded.

Greenshoe Option A provision contained in an underwriting agreement that gives the underwriter theright to sell investors more shares than originally planned by the issuer. This wouldnormally be done if the demand for a security issue proves higher than expected.Legally referred to as an over-allotment option. A greenshoe option can provideadditional price stability to a security issue because the underwriter has the abilityto increase supply and smooth out price fluctuations if demand surges.Greenshoe options typically allow underwriters to sell up to 15% more shares thanthe original number set by the issuer, if demand conditions warrant such action.However, some issuers prefer not to include greenshoe options in theirunderwriting agreements under certain circumstances, such as if the issuer wants tofund a specific project with a fixed amount of cost and does not want more capitalthan it originally sought.The term is derived from the fact that the Green ShoeCompany was the first to issue this type of option.

Red Herring preliminary registration statement that must be filed with SEBI describing a newissue of stock and the prospects of the issuing company. There is no price or issue size stated in the red herring, and it is sometimes updatedseveral times before being called the final prospectus. It is known as a red herringbecause it contains a passage in red that states the company is not attempting to sellits shares before the registration is approved by the SEBI

Book Building The process by which an underwriter attempts to determine at what price to offeran IPO based on demand from institutional investors. An underwriter "builds abook" by accepting orders from fund managers indicating the number of sharesthey desire and the price they are willing to pay.

Book Runner The managing or lead underwriter who maintains the books of securities sold for anew issue. In other words, this person is the underwriter who "runs" the books.Often the book runner is given credit for the total size of the deal.

Pump Priming Deficit financing & spending by a government on public works in an attempt to



revive economy during recession. It can raise the purchasing power of the people &thus stimulate & revive economic activity to the point that deficit spending will nolonger be considered necessary to maintain the desired economy activity.

WorldDevelopmentReport

World Development Report 2008: Agriculture for DevelopmentWorld Development Report 2007: Development & the next generationWorld Development Report 2006: Equity & DevelopmentWorld Development Report 2005: A Better Investment Climate for Everyone

Affliates of WorldBank

· International Finance Corporation (IFC)· International Development Association (IDA)· Multilateral Investment Guarantee Agency· ICSID – International Centre for Settlement of Investment Disputes

Hedge Fund An aggressively managed portfolio of investments that uses advanced investmentstrategies such as leverage, long, short and derivative positions in both domesticand international markets with the goal of generating high returns (either in anabsolute sense or over a specified market benchmark). Legally, hedge funds aremost often set up as private investment partnerships that are open to a limitednumber of investors and require a very large initial minimuminvestment. Investments in hedge funds are illiquid as they often require investorskeep their money in the fund for a minimum period of at least one year.

Medical Tourism Medical Tourism India (a.k.a. Health Tourism India) is a developing conceptwhereby people from world over visit India for their medical and relaxation needs.Most common treatments are heart surgery, knee transplant, cosmetic surgery anddental care. India is known in particular for heart surgery, hip resurfacing and otherareas of advanced medicine. The government and private hospital groups arecommitted to the goal of making India a world leader in the industry. Theindustry's main appeal is low-cost treatment. Most estimates claim treatment costsin India start at around a tenth of the price of comparable treatment in America orBritain. Estimates of the value of medical tourism to India go as high as $2 billiona year by 2012. The Indian government is taking steps to address otherinfrastructure issues that can serve as a deterrant to the country's growth in medicaltourism. The south Indian city of Chennai has been declared India's Health Capital,as it nets in 45% of health tourists from abroad and 30-40% of domestic healthtourists.[

ISO 9000 ISO 9000 is a family of standards for quality management systems. ISO 9000 ismaintained by ISO, the International Organization for Standardization and isadministered by accreditation and certification bodies. Some of the requirements inISO 9001 (which is one of the standards in the ISO 9000 family) would include:

· a set of procedures that cover all key processes in the business;· monitoring processes to ensure they are effective;· keeping adequate records;· checking output for defects, with appropriate corrective action where

necessary;· regularly reviewing individual processes and the quality system itself for

effectiveness; and· facilitating continual improvement

ISO 14000 The ISO 14000 environmental management standards exist to help organizations



minimize how their operations negatively affect the environment (cause adversechanges to air, water, or land), comply with applicable laws, regulations, and otherenvironmentally oriented requirements, and continually improve on the above.ISO 14000 is similar to ISO 9000 quality management in that both pertain to theprocess (the comprehensive outcome of how a product is produced) rather than tothe product itself. The overall idea is to establish an organized approach tosystematically reduce the impact of the environmental aspects which anorganization can control. Effective tools for the analysis of environmental aspectsof an organization and for the generation of options for improvement are providedby the concept of Cleaner Production.

Non FactorServices

Non-factor services refer to all invisible receipts or payments not attributable toany of the conventional `factors of production', i.e labour (remittances fromoverseas migrants) and capital (income from investments, interest payments,dividend repatriation). Thus, non-factor services include forex earnings andexpenses on account of tourism, shipping/freight and various `miscellaneous' sub-heads, under which export of software features.

WTO’s Agreementon Agriculture &Subsidies

Amber Box: All domestic subsidies – such as market price support - that areconsidered to distort production and trade. Amber Box subsidies are subject toWTO reduction commitments. It is deemed to be trade distorting primarily byencouraging excessive production.

Blue Box: Subsidy payments that are directly linked to acreage or animal numbers,but under schemes which also limit production by imposing production quotas orrequiring farmers to set-aside part of their land. These are deemed by WTO rules tobe ‘partially decoupled’ from production and are not subject to WTO reductioncommitments. In the EU, they are commonly known as direct payments. These arepayments linked to production limiting program.

Green Box: subsidies that are deemed not to distort trade, or at most causeminimal distortion and are not subject to WTO reduction commitments. For the EUand US one of the most important allowable subsidies in this category is decoupledsupport paid directly to producers. Such support should not relate to currentproduction levels or prices. It can also be given on condition that no productionshall be required in order to receive such payments.

NAMA The negotiations Non-Agriculture Market Access (NAMA) are based on the Dohamandate of 2001 that calls for a reduction or elimination in tariff peaks, tariffescalation, high tariffs and non-tariff barriers, particularly on goods that are ofexport value and therefore of interest to developing countries. NAMA refers to allthose products that are not covered by the Agreement on Agriculture or thenegotiations on services. In practice, NAMA products include manufacturingproducts, fuels and mining products, fish and fish products, and forestry products.The NAMA negotiations have been considered important by the WTO as NAMAproducts account for almost 90% of the world's mechandise exports.

MIGA The Multilateral Investment Guarantee Agency (MIGA) is a member of the WorldBank group. It was established to promote foreign direct investment intodeveloping countries. MIGA was founded in 1988 with a capital base of $1 billionand is headquartered in Washington, D.C. MIGA promotes foreign direct



investment into developing countries by insuring investors against political risk,advising governments on attracting investment, sharing information through on-line investment information services, and mediating disputes between investors andgovernments. MIGA also requires host country government approval for everyproject. MIGA tries to work with host governments - resolving claims before theyare filed

Inflation Types 1 - Creeping Inflation: When prices rise at very slow rate, i.e. creeper’s speed, itis called ‘creeping inflation. Generally 3% annual rise in prices is considered as‘creeping inflation’.

2- Walking or Trotting Inflation: When inflation is in between 3% to 7%, it’sregarded as ‘walking or trotting inflation’. Some economists have extended theboundary of this type of inflation up to 10% per annum. This type of inflation isconsidered as a warning signal for the government to take some measures tocontrol the situation.

3- Running Inflation: This type of inflation comes into action when there’s arapid rise in prices and the range of this type lies in between 10% to 20% perannum. This type of inflation is controllable only by strong monetary and fiscalmeasures, lest it will be turned into ‘hyper inflation’.

4- Hyper Inflation or Galloping Inflation: The rise of prices from 20% to 100 %per annum is regarded as ‘hyper inflation’ or ‘galloping inflation’. This case ofinflation is un controllable.

5- Demand Pull Inflation: This type of inflation is results as an excess demand. Inthis case supply remains constant (couldn’t be upgraded as per demand). Soconsequently, the prices go up.

6- Cost Push Inflation: When there’s increase in money-wages at speedier ratethan that of the rise in the productivity of labour, it results as increased cost ofproduction which furthers the increase in prices. This type of inflation is regardedas cost push inflation.

7- Mixed Inflation: Majority of the economists hold that, inflation is neithercompletely ‘demand pull’ nor completely ‘cost push’, the actual inflationaryprocess contains the elements of both. Excess demand and increase in moneywages operate at the same time, but it’s not necessary that they start at the sametime.

8- Markup inflation: Garner Akley put forward the theory of ‘mark up inflation’.In simple words it is an advanced explaination of ‘Mixed inflation’. According toAkley First comes demand pull inflation, and it is led by cost push inflation.Markup inflation comes to happen when excess demand increases the prices, whichstimulates the production. The increasing production creates excessive demand forthe factors of production, and the excessive demand for the factors of production



further raises the prices.

9- Stagflation: Stagflation is a situation, whereby economy faces stagnation ofoutput and unemployment along with a high rate of inflation. This situation is alsoknown as ‘inflationary recession’.

Disinflation &Deflation

Disinflation is a decrease in the rate of inflation. Being how much prices areincreasing per unit of time, it can be expressed using the word disinflation: Theslowing of the rate of inflation per unit of time. For example in one month the rateof inflation could be was 4.4% and in May the rate of inflation was 4.0%. In thisinstance the price of goods and services is still increasing; however, it is increasingat a slower rate, 0.4% less, than a month before. It should not be confused withdeflation, which is an overall decrease in prices. Disinflation is generallyconsidered to be a very positive state for the economy. Over the last twenty yearsNorth America has seen steady disinflation, and many credit this with the stronggrowth during this period. While disinflation is generally perceived as positive, it isnot good for the effect to go so far as deflation, which is generally perceived to be avery negative state for an economy.

Deflation is a decrease in the general price level over a period of time. Deflation isthe opposite of inflation. For economists especially, the term has been and issometimes used to refer to a decrease in the size of the money supply (as aproximate cause of the decrease in the general price level). The latter is now moreoften referred to as a 'contraction' of the money supply. During deflation thedemand for liquidity goes up, in preference to goods or interest. During deflationthe purchasing power of money increases.Deflation is considered a problem in amodern economy because of the potential of a deflationary spiral and itsassociation with the Great Depression, although not all episodes of deflationcorrespond to periods of poor economic growth historically.

Core BankingSolution

The platform where communication technology and information technology aremerged to suit core needs of banking is known as Core Banking Solutions. Herecomputer software is developed to perform core operations of banking likerecording of transactions, passbook maintenance, interest calculations on loans anddeposits, customer records, balance of payments and withdrawal are done. Thissoftware is installed at different branches of bank and then interconnected bymeans of communication lines like telephones, satellite, internet etc. It allows theuser (customers) to operate accounts from any branch if it has installed corebanking solutions. This new platform has changed the way banks are working.Now many advanced features like regulatory requirements and other specialisedservices like share (stock) trading are being provided.

SEMFEX II The Self Employment Scheme For Ex-servicemen (SEMFEX-II) has been inoperation since 1988. The scheme has been specially designed to provide acomprehensive package of credit for encouraging ex-servicemen, disabled servicepersonnel, war widows and widows of ex-servicemen to undertake agricultural andallied activities or to set up non-farm units in rural areas to earn their livelihood forleading a dignified life.

SEMFEX III Scheme has been formulated Jointly by the DGR (Directorate GeneralResettlement) and Khadi and Village Industries Commission (KVIC) & launched



in 1991.· Scheme is operative in rural areas.· Village Industries within the purview of KVIC are only financed.· Loan is available for individual Ex-Servicemen and Co-operatives.· Individual projects can be financed upto Rs 10.00 Lakhs by KVIC/KVIBS.· Upper loan limit is Rs 25.00 Lakhs.

ForeignInvestmentPromotion Board(FIPB)

Its objective is to promote FDI into India by undertaking investment promotionactivities in India and abroad by facilitating investment in the country throughinternational companies, non-resident Indians and other foreign investors. Itidentifies sectors & countries in which & from which more & more of foreigninvestment is required & can be channelized.

FIPC Foreign Investment Promotion Council. It’s a body of experts to target specificcountries & specific sectors to attract FDI by projecting India’s image as anattractive destination.

ForeignInvestmentImplementationAuthority (FIIA)

Government of India has set up the Foreign Investment Implementation Authority(FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvalsinto implementation, to provide a pro-active one stop after care service to foreigninvestors by helping them obtain necessary approvals, sort out operationalproblems and meet with various Government agencies to find solution to theirproblems. FIPB & FIIA are the two agencies promoting foreign investment inIndia.

FDI Policy inIndia

India has among the most liberal and transparent policies on FDI among theemerging economies. FDI up to 100% is allowed under the automatic route in allactivities/sectors except the following, which require prior approval of theGovernment:-1. Sectors prohibited for FDI2. Activities/items that require an industrial license3. Proposals in which the foreign collaborator has an existing financial/technicalcollaboration in India in the same field4. Proposals for acquisitions of shares in an existing Indian company in financialservice sector and where Securities and Exchange Board of India (substantialacquisition of shares and takeovers) regulations, 1997 is attracted5. All proposals falling outside notified sectoral policy/CAPS under sectors inwhich FDI is not permittedMost of the sectors fall under the automatic route for FDI. In these sectors,investment could be made without approval of the central government. The sectorsthat are not in the automatic route, investment requires prior approval of theCentral Government. The approval in granted by Foreign Investment PromotionBoard (FIPB). In few sectors, FDI is not allowed.

Automatic Route FDI in sectors/activities to the extent permitted under automatic route does notrequire any prior approval either by the Government or RBI. The investors are onlyrequired to notify the Regional Office concerned of RBI within 30 days of receiptof inward remittances and file the required documents with that office within 30days of issue of shares of foreign investors.

FDI RequiringGovernmentApproval

FDI in activities not covered under the automatic route require prior governmentapproval. Approvals of all such proposals including composite proposals involvingforeign investment/foreign technical collaboration is granted on the



recommendations of Foreign Investment Promotion Board (FIPB).Prohibited Sectorsfor FDI

The extant policy does not permit FDI in the following cases:i. Gambling and bettingii. Lottery Businessiii. Atomic Energyiv. Retail Tradingv. Agricultural or plantation activities of Agriculture (excluding Floriculture,Horticulture, Development of Seeds, Animal Husbandry, Pisiculture andCultivation of Vegetables, Mushrooms etc., under controlled conditions andservices related to agro and allied sectors) and Plantations (other than TeaPlantations)

IndustriesRequiringCompulsoryLicensing

With progressive liberalization and deregulation of the economy, industrial licenseis required in very few cases. Industrial licenses are regulated under the Industries(Development and Regulation) Act 1951. At present, industrial license is requiredonly for the following: -1. Industries retained under compulsory licensing2. Manufacture of items reserved for small scale sector by larger units3. When the proposed location attracts locational restriction

The following industries require compulsory license: -I Alcoholics drinksII Cigarettes and tobacco productsIII Electronic aerospace and defense equipmentIV ExplosivesV Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates of hydro carbon and derivatives

Engel Curve An Engel curve is the relationship between the amount of a product that people arewilling to buy and their income. An Engel curve is shown below.

Engel’s Law(UPSC 2007)

Engel's law is an observation in economics stating that, with a given set of tastesand preferences, as income rises, the proportion of income spent on food falls, evenif actual expenditure on food rises. In other words, the income elasticity of demandof food is less than 1. The law was named after the statistician Ernst Engel.

Lorenz Curve &Gini Coefficient

A Lorenz curve shows the degree of inequality that exists in the distributions oftwo variables, and is often used to illustrate the extent that income or wealth aredistributed unequally in a particular society.



The Gini coefficient is the area between the line of perfect equality and theobserved Lorenz curve, as a percentage of the area between the line of perfectequality and the line of perfect inequality.A Gini coefficient is a summarynumerical measure of how unequally one variable is related to another. The Ginicoefficient is a number between 0 and 1, where perfect equality has a Ginicoefficint of zero, and absolute inequality yields a Gini coefficint of 1.

Trickle DownTheory (UPSC2007)

An economic theory given by Simon Kuznet which states that investing money incompanies and giving them tax breaks is the best way to stimulate the economy.Proponents of this theory believe that when government helps companies, they willproduce more and thereby hire more people and raise salaries. The people, in turn,will have more money to spend in the economy.

Tight Money orDear Money

A situation in which money or loans are very difficult to obtain in a given country.If you do have the opportunity to secure a loan, then interest rates are usuallyextremely high. Also known as "dear money".

Soft Money orCheap Money

Credit available at low rate of interest.

Soft Currency Another name for "weak currency". The values of soft currencies fluctuate often,and other countries do not want to hold these currencies due to political oreconomic uncertainty within the country with the soft currency. Currencies frommost developing countries are considered to be soft currencies. Often, governmentsfrom these developing countries will set unrealistically high exchange rates,pegging their currency to a currency such as the U.S. dollar.

Hard Currency A currency, usually from a highly industrialized country, that is widely acceptedaround the world as a form of payment for goods and services. A hard currency isexpected to remain relatively stable through a short period of time, and to be highlyliquid in the forex market.Another criterion for a hard currency is that the currencymust come from a politically and economically stable country. The U.S. dollar andthe British pound are good examples of hard currencies.

STAG Stock market investor who invests in IPO in the hope of selling it immediatelyupon listing and making a profit.

Gresham’s Law Bad money puts good money out of circulation. It was given by Sir ThomasGresham.



Balance ofPayments

The balance of payments, (or BOP) measures the payments that flow between anyindividual country and all other countries. It is used to summarize all internationaleconomic transactions for that country during a specific time period, usually a year.The BOP is determined by the country's exports and imports of goods, services,and financial capital, as well as financial transfers. It reflects all payments andliabilities to foreigners (debits) and all payments and obligations received fromforeigners (credits). The components of balance of payments are:1. Current Account2. Capital Account3. Financial Account4. Net Errors and Omissions5. Official reserves

The current account is the sum of net sales from trade in goods and services, netfactor income (such as interest payments from abroad), and net unilateral transfersfrom abroad (such as foreign aid, gifts). Positive net sales to abroad corresponds toa current account surplus; negative net sales to abroad corresponds to a currentaccount deficit. Trade in goods is also known as trade in visibles or tangibles,Trade in services is also known as trade in invisibles or intangibles.The capital account "records the international flows of transfer payments relatingto capital items". It therefore records a country's inflows and outflows of paymentsand transfer of ownership of fixed assets (capital goods). Examples of such goodscould be factories and so on.The financial account is the net change in foreign ownership of domestic financialassets. If foreign ownership of domestic financial assets has increased more quicklythan domestic ownership of foreign assets in a given year, then the domesticcountry has a financial account surplus. On the other hand, if domestic ownershipof foreign financial assets has increased more quickly than foreign ownership ofdomestic assets, then the domestic country has a financial account deficit. Theaccounting entries in the financial account record the purchase and sale of domesticand foreign assets. These assets are divided into categories such as Foreign DirectInvestment (FDI), Portfolio Investment (which includes trade in stocks and bonds),and Other Investment (which includes transactions in currency and bank deposits).Net Errors & Omissions only exists to correct any possible errors made inaccounting for the three other accounts. These errors are common to occur due tothe complexity of the calculations.The official reserves account records the current stock of reserve assets (and oftensimply referred to as foreign exchange reserves) available to and controlled by thecountry's authorities for financing of international payment imbalances, foreignexchange intervention and other uses.

Multi FibreAgreement (MFA)

The Multi Fibre Arrangement (MFA) (a.k.a. Agreement on Textile and Clothing(ATC)) governed the world trade in textiles and garments from 1974 through 2004,imposing quotas on the amount developing countries could export to developedcountries. It expired on 1 January 2005.The MFA was introduced in 1974 as a short-term measure intended to allowdeveloped countries to adjust to imports from the developing world. Developingcountries have a natural advantage in textile production because it is labor intensiveand they have low labor costs.



India’s Export-Import Policy(2002-07)

HIGHLIGHTS OF EXIM POLICY 2002-07 (as amended upto 31.3.2003)Service Exports

Duty free import facility for service sector having a minimum foreign exchangeearning of Rs.10 lakhs. The duty free entitlement shall be 10% of the averageforeign exchange earned in the preceding three licensing yearsAgro ExportsCorporate sector with proven credential will be encouraged to sponsor Agri ExportZone for boosting agro exports. The corporates to provide services such asprovision of pre/post harvest treatment and operations, plant protection,Status HoldersDuty-free import entitlement for status holders having incremental growth of morethan 25% in FOB value of exports (in free foreign exchange). This facility shallhowever be available to status holders having a minimum export turnover of Rs.25crore (in free foreign exchange). The duty free entitlement shall be 10% of theincremental growth in exports and can be used for import of capital goods, officeequipment and inputs for their own factory or the factory of theassociate/supporting manufacturer/job worker.Hardware/SoftwareTo promote growth of exports in embedded software, hardware shall be admissiblefor duty free import for testing and development purposes.Gem & Jewellery SectorDiamond & Jewellery Dollar Account for exporters dealing in purchase/sale ofdiamonds and diamond studded jewellery. Nominated agencies to accept paymentin dollars for cost of import of precious metals from EEFC account of exporter.Gem & Jewellery units in SEZ and EOUs can receive precious metal i.e.Gold/Silver/Platinum prior to exports or post exports equivalent to value ofjewellery exported. This means that they can bring export proceeds in kind againstthe present provision of bringing in cash only.Export ClustersUpgradation of infrastructure in existing clusters/industrial locations under theDepartment of Industrial Policy & Promotion (DIPP) scheme to increase overallcompetitiveness of the export clustersRemoval of Quantitative RestrictionsImport of 69 items covering animal products, vegetables and spices, antibiotics andfilms removed from restricted list.Special Economic Zones SchemeSales from Domestic Tariff Area (DTA) to SEZs to be treated as export. Thiswould now entitle domestic suppliers to Drawback/DEPB benefits, CST exemptionandReduction in penal interest rate from 24 percent to 15 percent for all old cases ofdefault under Exim Policy.

Indian Tax System The government of India imposes a progressive income tax on taxable. The IncomeTax department is governed by the Central Board for Direct Taxes (CBDT. Theindividual income tax is a progressive tax with three brackets. No income tax isapplicable on income up to INR 110,000 per year. (INR 145,000 for women andINR 195,000 for senior citizens). The highest bracket is 30%, with a 10%surcharge (tax on tax) for incomes above Rs. 10 lakh (INR 1 million). All income



taxes are subject to 3% education cess, applicable on the tax paid.Business income is taxed at a flat rate of 33% for Indian companies and 40% forforeign companies.[8] Dividends are income tax free to shareholders. Instead,companies are charged a 15% dividend distribution tax. Long term capital gains isexempted from tax provided securities transaction tax paid. For sales of shares inrecognized stock exchanges, long term (held above 1 year) capital gains are nottaxed, and short term (less than 1 year of holding) gains are charged 10% taxprovided the Securities Transaction Tax has been paid. All other short term gainsare clubbed with income in the year the gains occur.Since April 01, 2005, most of the State Governments in India have replaced salestax with VAT.Taxes Levied by Central GovernmentDirect Taxes

Tax on Corporate Income Capital Gains Tax Personal Income Tax Tax Incentives Double Taxation Avoidance Treaty

Indirect Taxes Excise Duty Customs Duty Service Tax Securities Transaction Tax

Taxes Levied by State Governments and Local Bodies Sales Tax/VAT Other Taxes

Trade Barrier A trade barrier is a general term that describes any government policy or regulationthat restricts international trade. The barriers can take many forms, including:Import duties

· Import licenses· Export licenses· Import quotas· Tariffs· Subsidies· Non-tariff barriers to trade· Voluntary Export Restraints· Local Content Requirements

Non Tariff TradeBarriers

Non-tariff barriers to trade are trade barriers that restrict imports but are not in theusual form of a tariff. Some of the common examples are anti-dumping measuresand countervailing duties, which, although they are called "non-tariff" barriers,have the effect of tariffs but are only imposed under certain conditions. Their usehas risen sharply after the WTO rules led to a very significant reduction in tariffuse.

CountervailingDuty(UPSC 2007)

Countervailing duties (CVDs) are a means to restrict international trade. They areimposed when a foreign country subsidizes its exports, hurting domestic producers.



IncrementalCapital OutputRatio

The Incremental Capital-Output Ratio (ICOR), is the ratio of investment to growthwhich equals to 1 divided by the marginal product of capital. The higher the ICOR,the lower the productivity of capital. The ICOR can be thought of as a measure ofthe inefficiency with which capital is used.

CCIL(UPSC 2007)

The Clearing Corporation of India Ltd. (CCIL) was set up in 2001 for providingexclusive clearing and settlement for transactions in Money, GSecs and ForeignExchange.

SARFAESI Act2002

Securitization & Reconstruction of Financial Assets & Enforcement of SecurityInterests. Enacted in 2002 to empower banks to sell the assets pledged by theborrower without prior permission of the court to recover Non-Performing Assets(NPA).

AdministeredPrice

Price of a good that is specified by a governmental or some other nonmarketagency. Wage price controls and rent controls are examples of administered prices.

MFN(UPSC 2007)

Most favoured nation (MFN), is a status awarded by one nation to another ininternational trade. It means that the receiving nation will be granted all tradeadvantages - such as low tariffs - that any other nation also receives. In effect,having MFN status means that one's nation will not be treated worse than anyoneelse's nation.

Merit Goods(UPSC 2007)

Merit goods are goods and services where the social benefits exceed the privatebenefits. With merit goods - the state is concerned with maximising theconsumption of certain goods which it deems to be desirable; goods and serviceswhere the social benefits exceed the private benefits, e.g. Education and Healthcareare assumed to generate positive externalities.

Non-pricecompetition

Trying to win business from rivals other than by charging a lower PRICE. Methodsinclude ADVERTISING, slightly differentiating your product etc.

Antitrust Government policy for dealing with monopoly. Antitrust laws aim to stop abusesof market power by big companies and, sometimes, to prevent corporate mergersand acquisitions that would create or strengthen a monopolist.

Autarky The idea that a country should be self-sufficient and not take part in internationaltrade

Capital AdequacyRatio

The ratio of a BANK’s CAPITAL to its total ASSETS, required by regulators to beabove a minimum (“adequate”) level so that there is little RISK of the bank goingbust. How high this minimum level is may vary according to how risky a bank’sactivities are.

Beta Beta measures the sensitivity of the price of a particular asset to changes in themarket as a whole.

Bretton Woods A conference held at Bretton Woods, New Hampshire, in 1944, which designed thestructure of the international monetary system after the second world war and setup the IMF and the world bank. It was agreed that the exchange rates of IMFmembers would be pegged to the dollar, with a maximum variation of 1% eitherside of the agreed rate. Rates could be adjusted more sharply only if a country'sbalance of payments was in fundamental disequilibrium. In August 1971 economictroubles and the cost of financing the Vietnam war led the American president,Richard Nixon, to devalue the dollar. This shattered confidence in the fixedexchange rate system and by 1973 all of the main currencies were floating freely,at rates set mostly by market forces rather than government fiat.



Capital Flight When CAPITAL flows rapidly out of a country, usually because somethinghappens which causes investors suddenly to lose confidence in its economy.This isoften associated with a sharp fall in the EXCHANGE RATE of the abandonedcountry’s currency.

Catch Up Effect In any period, the economies of countries that start off poor generally grow fasterthan the economies of countries that start off rich. As a result, the NATIONALINCOME of poor countries usually catches up with the national income of richcountries.

Classical &KeynesianEconomics

The dominant theory of economics from the 18th century to the 20th century, whenit evolved into NEO-CLASSICAL ECONOMICS. Classical economists, whoincluded Adam SMITH, David RICARDO and John Stuart Mill, believed that thepursuit of individual self-interest produced the greatest possible economic benefitsfor society as a whole through the power of the INVISIBLE HAND. They alsobelieved that an economy is always in EQUILIBRIUM or moving towards it.

In the 1920s and 1930s, John Maynard KEYNES attacked some of the main beliefsof classical and neo-classical economics, which became unfashionable. Inparticular, he argued that the rate of interest was determined or influenced by thespeculative actions of investors in BONDS and that wages were inflexibledownwards, so that if demand for labour fell, the result would be higherUNEMPLOYMENT rather than cheaper workers.

ComparativeAdvantage

It shows how countries can gain from trading with each other even if one of them ismore efficient – it has an ABSOLUTE ADVANTAGE – in every sort of economicactivity. Comparative advantage is about identifying which activities a country (orfirm or individual) is most efficient at doing.

ContestableMarket

A market in which an inefficient firm, or one earning excess profits, is likely to bedriven out by a more efficient or less profitable rival.

Externality An economic side-effect. Externalities are costs or benefits arising from aneconomic activity that affect somebody other than the people engaged in theeconomic activity and are not reflected fully in PRICES. For instance, smokepumped out by a factory may impose clean-up costs on nearby residents; bees keptto produce honey may pollinate plants belonging to a nearby farmer, thus boostinghis crop.

Econometrics Mathematics and sophisticated computing applied to ECONOMICSEfficient MarketHypothesis

The efficient market hypothesis says that the PRICE of a financial ASSET reflectsall the INFORMATION available and responds only to unexpected news.

Elasticity A measure of the responsiveness of one variable to changes in another. Economistshave identified four main types.PRICE ELASTICITY measures how much the quantity of SUPPLY of a good, orDEMAND for it, changes if its PRICE changes. If the percentage change inquantity is more than the percentage change in price, the good is price elastic; if itis less, the good is INELASTIC.INCOME elasticity of demand measures how the quantity demanded changeswhen income increases.Cross-elasticity shows how the demand for one good (say, coffee) changes whenthe price of another good (say, tea) changes. If they are SUBSTITUTE GOODS(tea and coffee) the cross-elasticity will be positive: an increase in the price of tea



will increase demand for coffee. If they are COMPLEMENTARY GOODS (teaand teapots) the cross-elasticity will be negative. If they are unrelated (tea and oil)the cross-elasticity will be zero.Elasticity of substitution describes how easily one input in the productionprocess, such as LABOUR, can be substituted for another, such as machinery.

Eurodollar A deposit in dollars held in a BANK outside the United States. Such deposits areoften set up to avoid taxes and currency exchange costs. They are frequently lentout and have become an important method of CREDIT CREATION.

Currency Board A means by which some countries try to defend their currency from speculativeattack. A country that introduces a currency board commits itself to converting itsdomestic currency on demand at a fixed EXCHANGE RATE. To make thiscommit ment credible, the currency board holds RESERVES of foreign currency(or GOLD or some other liquid ASSET) equal at the fixed rate of exchange to atleast 100% of the value of the domestic currency that is issued.Unlike a conventional CENTRAL BANK, which can print MONEY at will, acurrency board can issue domestic notes and coins only when there are enoughforeign exchange reserves to back it.

Currency Peg When a GOVERNMENT announces that the EXCHANGE RATE of its currencyis fixed against another currency or currencies.

Balance ofPayments

The total of all the money coming into a country from abroad less all of the moneygoing out of the country during the same period. This is usually broken down intothe current account and the capital account.The current account includes:· visible trade (known as merchandise trade in the United States), which is the

value of exports and imports of physical goods;· invisible trade, which is receipts and payments for services, such as banking or

advertising, and other intangible goods, such as copyrights, as well as cross-border dividend and interest payments;

· private transfers, such as money sent home by expatriate workers;· official transfers, such as international aid.

The capital account includes:· long-term capital flows, such as money invested in foreign firms, and profits

made by selling those investments and bringing the money home;· short-term capital flows, such as money invested in foreign currencies by

international speculators, and funds moved around the world for businesspurposes by multinational companies. These short-term flows can lead to sharpmovements in exchange rates, which bear little relation to what currenciesshould be worth judging by fundamental measures of value such as purchasingpower parity.

As bills must be paid, ultimately a country's accounts must balance (althoughbecause real life is never that neat a balancing item is usually inserted to cover upthe inconsistencies).

Factor Cost A measure of OUTPUT reflecting the costs of the factors of production used, ratherthan market prices, which may differ because of indirect tax and subsidy.

Factors ofProduction

The ingredients of economic activity: land, labour, capital and enterprise.



Fiscal Neutrality When the net effect of taxation and public spending is neutral i.e. neitherstimulating nor dampening demand. The term can be used to describe the overallstance of fiscal policy: a balanced budget is neutral, as total tax revenue equalstotal public spending.

Fiscal Policy One of the two instruments of macroeconomic policy; monetary policy's side-kick.It comprises public spending and taxation, and any other government income orassistance to the private sector (such as tax breaks). It can be used to influence thelevel of demand in the economy, usually with the twin goals of gettingunemployment as low as possible without triggering excessive inflation.

Monetary Policy What a CENTRAL BANK does to control the MONEY SUPPLY, and therebymanage DEMAND. Monetary policy involves OPEN-MARKET OPERATIONS,RESERVE REQUIREMENTS and changing the short-term rate of interest. It isone of the two main tools of MACROECONOMIC POLICY, the side-kick ofFISCAL POLICY, and is easier said than done well.

The RBI uses the interest rate, Open Market Operations (OMO), changes in banks'CRR and primary placements of government debt to control the money supply.OMO, primary placements and changes in the CRR are the most popularinstruments used.· Under the OMO, the RBI buys or sells government bonds in the secondary

market. By absorbing bonds, it drives up bond yields and injects money into themarket. When it sells bonds, it does so to suck money out of the system.

· The changes in CRR affect the amount of free cash that banks can use to lend -reducing the amount of money for lending cuts into overall liquidity, drivinginterest rates up, lowering inflation and sucking money out of markets.

· Primary deals in government bonds are a method to intervene directly inmarkets, followed by the RBI. By directly buying new bonds from thegovernment at lower than market rates, the RBI tries to limit the rise in interestrates that higher government borrowings would lead to.

Hawala/Hundi Hawala (also known as hundi) is an informal value transfer system based onperformance and honor of a huge network of money brokers which are primarilylocated in the Middle East, Africa and Asia. In the most basic variant of the hawalasystem, money is transferred via a network of hawala brokers, or hawaladars. Acustomer approaches a hawala broker in one city and gives a sum of money to betransferred to a recipient in another, usually foreign, city. The hawala broker callsanother hawala broker in the recipient's city, gives disposition instructions of thefunds (usually minus a small commission), and promises to settle the debt at a laterdate.

HorizontalIntegration

Merging with another firm just like yours, for example, two biscuit makersbecoming one. Contrast with VERTICAL INTEGRATION, which is merging witha firm at a different stage in the SUPPLY chain. Horizontal integration often raisesANTITRUST concerns, as the combined firm will have a larger market share thaneither firm did before merging.

Hot Money Money that is held in one currency but is liable to switch to another currency at amoment’s notice in search of the highest available RETURNS, thereby causing thefirst currency’s EXCHANGE RATE to plummet.

Hypothecation Earmarking taxes for a specific purpose. It may be a clever way to get around



public hostility to paying more in TAXATION. If people are told that a specificshare of their INCOME TAX will go to some popular cause, say education orhealth, they may be more willing to cough up.

Oligopoly When a few FIRMS dominate a market. Often they can together behave as if theywere a single MONOPOLY, perhaps by forming a CARTEL. Or they may colludeinformally, by preferring gentle NON-PRICE COMPETITION to a bloody PRICEwar. Because what one firm can do depends on what the other firms do, thebehaviour of oligopolists is hard to predict. When they do compete on price, theymay produce as much and charge as little as if they were in a market withPERFECT COMPETITION.

Income Effect A change in the DEMAND for a good or service caused by a change in theINCOME of consumers rather than, say, a change in consumer tastes. Contrastwith SUBSTITUTION EFFECT.

Inelastic When the SUPPLY or DEMAND for something is insensitive to changes inanother variable, such as PRICE.

Inferior Goods Products that are less in demand as consumers get richer. For NORMAL GOODS,DEMAND increases as consumers have more to spend.

Invisible Hand Adam Smith’s term for the ability of the free market to allocate FACTORS OFPRODUCTION, goods and SERVICES to their most valuable use.

Okun’s Law A description of what happens to UNEMPLOYMENT when the rate of GROWTHof GDP changes, based on empirical research by Arthur Okun

J Curve The shape of the trend of a country’s trade balance following a DEVALUATION.A lower EXCHANGE RATE initially means cheaper EXPORTS and moreexpensive IMPORTS, making the current account worse (a bigger DEFICIT orsmaller surplus). After a while, though, the volume of exports will start to risebecause of their lower PRICE to foreign buyers, and domestic consumers will buyfewer of the costlier imports. Eventually, the trade balance will improve on what itwas before the devaluation. If there is a currency APPRECIATION there may bean inverted J-curve.

Kleptocracy Corrupt, thieving GOVERNMENT, in which the politicians and bureaucrats incharge use the powers of the state to feather their own nests.

Laissez Faire Let-it-be ECONOMICS: the belief that an economy functions best when there is nointerference by GOVERNMENT.

Leveraged Buyout Buying a company using borrowed MONEY to pay most of the purchase PRICE.The DEBT is secured against the ASSETS of the company being acquired.

LIBOR Short for London interbank offered rate, the rate of INTEREST that top-qualityBANKS charge each other for loans.

Liquidity Trap When MONETARY POLICY becomes impotent. Cutting the rate of INTEREST issupposed to be the escape route from economic RECESSION: boosting theMONEY SUPPLY, increasing DEMAND and thus reducing UNEMPLOYMENT.But KEYNES argued that sometimes cutting the rate of interest, even to zero,would not help. People, BANKS and FIRMS could become so RISK AVERSE thatthey preferred the LIQUIDITY of cash to offering CREDIT or using the credit thatis on offer. In such circumstances, the economy would be trapped in recession,despite the best efforts of monetary policymakers

Luxuries Goods and SERVICES that have a high ELASTICITY of DEMAND. When thePRICE of, say, a Caribbean holiday rises, the number of vacations demanded falls



sharply. Likewise, demand for Caribbean holidays rises significantly asAVERAGE INCOME increases, certainly by more than demand for manyNORMAL GOODS. Contrast this with necessities, such as milk or bread, whichpeople usually demand in quite similar quantities whatever their income andwhatever the price.

DeadweightCost/Loss

The extent to which the value and impact of a tax, tax relief or SUBSIDY isreduced because of its side-effects. For instance, increasing the amount of taxlevied on workers’ pay will lead some workers to stop working or work less, soreducing the amount of extra tax to be collected. However, creating a tax relief orsubsidy to encourage people to buy life insurance would have a deadweight costbecause people who would have bought insurance anyway would benefit.

Marshall Plan Probably the most successful programme of INTERNATIONAL AID and nationbuilding in history. It was named after General George Marshall, an Americansecretary of state, who at the end of the second world war proposed giving aid toWestern Europe to rebuild its war-torn economies.

Menu Cost How much it costs to change PRICES. Just as a restaurant has to print a new menuwhen it changes the price of its food, so many other FIRMS face a substantialoutlay each time they cut or raise what they charge. Such menu costs mean thatfirms may be reluctant to change their prices every time there is a shift in thebalance of SUPPLY and DEMAND, so there will be STICKY PRICES and themarket for their OUTPUT will be in DISEQUILIBRIUM. The Internet maysharply reduce menu costs as it allows prices to be changed at the click of a mouse,which may improve EFFICIENCY by keeping markets more often inEQUILIBRIUM.

Misery IndexUPSC - 2001

Created by Economist Arthur Okun. The sum of a country’s INFLATION andUNEMPLOYMENT rates. The higher the score, the greater is the economicmisery.

MonetaryNeutrality

Changes in the MONEY SUPPLY have no effect on real economic variables suchas OUTPUT, real INTEREST rates and UNEMPLOYMENT. If the CENTRALBANK doubles the money supply, the PRICE level will double too.Today feweconomists think that pure monetary neutrality exists in the real world, at least inthe short run.

Money Market A segment of the financial market in which financial instruments with highliquidity and very short maturities are traded. The money market is used byparticipants as a means for borrowing and lending in the short term, from severaldays to just under a year. Money market securities consist of negotiable certificatesof deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper,municipal notes, federal funds and repurchase agreements (repos). The money market is used by a wide array of participants, from a company raisingmoney by selling commercial paper into the market to an investor purchasing CDsas a safe place to park money in the short term. The money market is typically seenas a safe place to put money due the highly liquid nature of the securities and shortmaturities, but there are risks in the market that any investor needs to be aware ofincluding the risk of default on securities such as commercial paper.

Capital Market Markets in SECURITIES such as BONDS and SHARES. Governments andcompanies use them to raise longer-term CAPITAL from investors, although fewof the millions of capital-market transactions every day involve the issuer of the



security. Most trades are in the SECONDARY MARKETS, between investors whohave bought the securities and other investors who want to buy them. Contrast withMONEY MARKETS, where short-term capital is raised.

Commercial Paper An unsecured, short-term debt instrument issued by a corporation, typically for thefinancing of accounts receivable, inventories and meeting short-term liabilities.Maturities on commercial paper rarely range any longer than 270 days. The debt isusually issued at a discount, reflecting prevailing market interest rates.Commercial paper is not usually backed by any form of collateral, so only firmswith high-quality debt ratings will easily find buyers without having to offer asubstantial discount (higher cost) for the debt issue.

Certificate ofDeposit

CD is a savings certificate entitling the bearer to receive interest. A CD bears amaturity date, a specified fixed interest rate and can be issued in any denomination.CDs are generally issued by commercial banks. The term of a CD generally rangesfrom one month to five years.A certificate of deposit is a promissory note issued by a bank. It is a time depositthat restricts holders from withdrawing funds on demand. Although it is stillpossible to withdraw the money, this action will often incur a penalty.

BankersAcceptance

A short-term credit investment created by a non-financial firm and guaranteed by abank. Acceptances are traded at a discount from face value on the secondarymarket. Banker's acceptances are very similar to T-bills and are often used inmoney market funds.

Treasury Bills A form of short-term GOVERNMENT DEBT. Treasury bills usually mature afterthree months. They are used for managing fluctuations in the government’s short-run cash needs. Most government borrowing takes the form of longer-termBONDS.

Repo Repos are classified as a money-market instrument. They are usually used to raiseshort-term capital. A form of short-term borrowing for dealers in governmentsecurities. The dealer sells the government securities to investors, usually on anovernight basis, and buys them back the following day.For the party selling the security (and agreeing to repurchase it in the future) it is arepo; for the party on the other end of the transaction, (buying the security andagreeing to sell in the future) it is a reverse repurchase agreement.

Call MoneyMarket/CallMoney

Call Money is a money market instrument. A market that consists of the borrowingof money by brokers and dealers for the purpose of meeting their credit needs.Along with day-to-day loans, call money loans play a significant role in interbankmoney dealings and between banks and money market dealers. Generally theseloans are made on a short term basis.

Monopsony A market dominated by a single buyer.Moral Hazard One of two main sorts of MARKET FAILURE often associated with the provision

of INSURANCE. The other is ADVERSE SELECTION. Moral hazard means thatpeople with insurance may take greater risks than they would do without it becausethey know they are protected, so the insurer may get more claims than it bargainedfor.

Adverse Selection When you do business with people you would be better off avoiding. This is one oftwo main sorts of market failure often associated with insurance. Insurance willoften not be profitable when buyers have better information about their risk of



claiming than does the seller.Multiplier Effect Shorthand for the way in which a change in spending produces an even larger

change in INCOME.Nash Equilibrium An important concept in GAME THEORY, a Nash equilibrium occurs when each

player is pursuing their best possible strategy in the full knowledge of the strategiesof all other players. Once a Nash equilibrium is reached, nobody has any incentiveto change their strategy. It is named after John Nash, a mathematician and Nobelprize-winning economist.

Overheating When an economy is growing too fast and its productive CAPACITY cannot keepup with DEMAND. It often boils over into INFLATION.

Overshooting The common tendency of PRICES in FINANCIAL MARKETS initially to movefurther than would seem strictly necessary in response to changes in thefundamentals that should, in theory, determine value. One reason may be that in theabsence of perfect INFORMATION, investors move in herds, rushing in and out ofmarkets on rumour.

Pareto Efficiency A situation in which nobody can be made better off without making somebody elseworse off.

Peak Pricing When CAPACITY is fixed and DEMAND varies during a time period, it maymake sense to charge above-AVERAGE PRICES when demand peaks. Becausethis will divert some peak demand to cheaper off-peak periods

Permanent IncomeHypothesis

Over their lives, people try to spread their spending more evenly than theirINCOME. What if somebody unexpectedly comes into money, say by winning thelottery? The permanent income hypothesis suggests that people will save most ofany such WINDFALL GAINS. Reality may be somewhat different.

Pigou Effect A fall in the PRICE level increases the REAL VALUE of people’s SAVINGS,making them feel wealthier and thus causing them to spend more. This increase inDEMAND can lead to higher employment.

Price Elasticity A measure of the responsiveness of DEMAND to a change in PRICE. If demandchanges by more than the price has changed, the good is price-elastic. If demandchanges by less than the price, it is price-inelastic.

Prisoner’sDilemma

Favourite example in GAME THEORY, which shows why co-operation is difficultto achieve even when it is mutually beneficial. Two prisoners have been arrestedfor the same offence and are held in different cells. Each has two options: confess,or say nothing. There are three possible outcomes. One could confess and agree totestify against the other as state witness, receiving a light sentence while his fellowprisoner receives a heavy sentence. They can both say nothing and may be luckyand get light sentences or even be let off, owing to lack of firm evidence. Or theymay both confess and probably get lighter individual sentences than one wouldhave received had he said nothing and the other had testified against him. Thesecond outcome would be the best for both prisoners. However, the RISK that theother might confess and turn state witness is likely to encourage both to confess,landing both with sentences that they might have avoided had they been able to co-operate in remaining silent. In an OLIGOPOLY, FIRMS often behave like theseprisoners, not setting PRICES as high as they could do if they only trusted theother firms not to undercut them. As a result, they are worse off.

Private Equity When a firm’s SHARES are held privately and not traded in the public markets.Private equity includes shares in both mature private companies and, as VENTURE



CAPITAL, in newly started businesses. As it is less liquid than publicly tradedEQUITY, investors in private equity expect on average to earn a higher EQUITYRISK PREMIUM from it.

ProgressiveTaxation

TAXATION that takes a larger proportion of a taxpayer’s INCOME the higher theincome is

Regressive Tax A tax that takes a smaller proportion of INCOME as the taxpayer’s income rises,for example, a fixed-rate vehicle tax that eats up a much larger slice of a poorperson’s income than a rich person’s income.

Random Walk Impossible to predict the next step. EFFICIENT MARKET THEORY says that thePRICES of many financial ASSETS, such as SHARES, follow a random walk.

Reflation Policies to pump up DEMAND and thus boost the level of economic activity.Monetarists fear that such policies may simply result in higher INFLATION.

Systemic Risk The RISK of damage being done to the health of the FINANCIAL SYSTEM as awhole. A constant concern of BANK regulators is that the collapse of a single bankcould bring down the entire financial system. This is why regulators often organisea rescue when a bank gets into financial difficulties.

Systematic Risk The RISK that remains after DIVERSIFICATION, also known as market risk orundiversifiable risk. It is systematic risk that determines the RETURN earned on awell-diversified portfolio of ASSETS.

Residual Risk When you buy an ASSET you become exposed to a bundle of different RISKs.Many of these risks are not unique to the asset you own but reflect broaderpossibilities, such as that the stockmarket average will rise or fall, that INTERESTrates will be cut or increased, or that the GROWTH rate will change in an entireeconomy or industry. Residual risk, also known as alpha, is what is left after youtake out all the other shared risk exposures. Exposure to this risk can be reduced byDIVERSIFICATION. Contrast with SYSTEMATIC RISK.

Safe Harbour Protection from the rough seas of REGULATION. Laws and regulations ofteninclude a safe harbour clause that sets out the circumstances in which otherwiseregulated FIRMS or individuals can do something without regulatory oversight orinterference.

Say’s Law SUPPLY creates its own DEMAND. So argued a French economist, Jean-BaptisteSay, and many classical and neo-classical economists since. KEYNES arguedagainst Say, making the case for the use of FISCAL POLICY to boost demand ifthere is not enough of it to produce FULL EMPLOYMENT.

CreativeDestruction

A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialismand Democracy" (1942) to denote a "process of industrial mutation that incessantlyrevolutionizes the economic structure from within, incessantly destroying the oldone, incessantly creating a new one. Eg. A smaller company eventually taking overan old behemoth by leveraging its new & efficient processes.

SDR Short for special drawing rights. Created in 1967, the SDR is the IMF's owncurrency. Its value is based on a portfolio of widely used currencies. You can thinkof SDRs as an artificial currency used by the IMF and defined as a "basket ofnational currencies". The IMF uses SDRs for internal accounting purposes. SDRsare allocated by the IMF to its member countries and are backed by the full faithand credit of the member countries' governments

Reserve Tranche The proportion of the required quota of currency that each International MonetaryFund (IMF) member country must provide to the IMF, but can designate for its



own use. The reserve tranche portion of the quota can be accessed by the membernation at any time, whereas the rest of the member's quota is typically unaccessible.Because IMF member nations have many different national currencies, the IMFdenominates its members' quotas in terms of special drawing rights (SDRs), whichis essentially a specified basket of major international currencies.A certain proportion of a member country's quota is specified as its reserve tranche.The member country can access its reserve tranche funds at its discretion, and isnot under an immediate obligation to repay those funds to the IMF. Member nationreserve tranches are typically 25% of the member's quota.

Securitization Turning a future cashflow into tradable, BOND-like SECURITIES. Creating suchASSET-backed securities became a lucrative business for financial FIRMS duringthe 1990s, as they invented new securities based on cashflow ranging from futuremortgage and credit-card payments to BANK loans, movie revenue and even theroyalties on songs by David Bowie (so-called Bowie-bonds). Securitisation hasmany benefits, at least in-theory. Issuers gain instant access to MONEY for whichthey would otherwise have to wait months or years, and they can shed some of theRISK that their expected revenue will not materialise.

Social Capital The amount of community spirit or trust that an economy has gluing it together.The more social capital there is, the more productive the economy will be.

Sticky Prices Petrol-pump PRICES do not change every time the oil price changes, and holidayprices and standard hotel rates are fixed for months. Sticky prices are slow tochange in response to changes in SUPPLY or DEMAND. As a result there is, atleast temporarily, DISEQUILIBRIUM in the market.

Tiger Economies The fast-growing developing economies of Asia, at least before their crisis in thelate 1990s.

Tobin Tax “Tobin tax”, a (so far unimplemented) proposal to reduce speculative cross-borderflows of CAPITAL by levying a small tax on foreign exchange transactions.

Transfer Pricing The PRICES assumed, for the purposes of calculating tax liability, to have beencharged by one unit of a multinational company when selling to another (foreign)unit of the same firm. FIRMS spend a fortune on advisers to help them set theirtransfer prices so that they minimise their total tax bill. For instance, by charginglow transfer prices from a unit based in a high-tax country that is selling to a unit ina low-tax country, a firm can record a low PROFIT in the first country and a highprofit in the second.

Transfers Payments that are made without any good or service being received in return.Much PUBLIC SPENDING goes on transfers, such as pensions and WELFAREbenefits. Private-sector transfers include charitable donations

UnemploymentForms

Functional unemployment occurs when people change from one job to another &there is an interval. This can happen even in a situation of full employment.Structural unemployment happens when jobs exist for qualified persons but theunemployed do not have the matching qualifications. It also occurs when labour isavailable, but factors of production are missing. Basically India’s unemployment isstructural in nature, related to the inadequacy of productive capacity to createenough jobs for all those willing to work. Not only is the productive capacity muchbelow the needed quantity, it is also found increasing at a low rate. This type ofunemployment is not a temporary phenomenon. It is chronic & is the result ofbackwardness & low rate of economic development



Cyclical unemployment arises out of cycles of recession. The main cause is theslackness in business activities. This type is generally witnessed in developedcountries.Seasonal Unemployment: Generally, seasonal unemployment is confined to theagricultural sector because nature predominates in agriculture. The demand foragriculture labour increases at the time of sowing & harvesting which providesemployment for 6-8 months and for the remaining period most of the agriculturalworkers remain unemployed.Disguised unemployment is when people are employed but their marginalproductivity is zero i.e. if a part of the labour is withdrawn the total production willremain unchanged.Technological Unemployment: When the introduction of new technology causesdisplacement of workers, it is called technological unemployment.

Poverty Trap orUnemploymentTrap

When unemployed people who receive benefits, either from the GOVERNMENTor from private CHARITY, are deterred from taking a new job because thereduction or removal of benefit if they do will make them worse off. Also knownas the POVERTY TRAP, it can be addressed, to an extent, by continuing to paybenefit for a while to unemployed people returning to work.

Vertical Equity One way to keep TAXATION fair. Vertical equity is the principle that people witha greater ability to pay should hand over more tax to the GOVERNMENT thanthose with a lesser ability to pay.

Visible Trade Physical EXPORTS and IMPORTS, such as coal, computer chips and cars. Alsoknown as merchandise trade. Contrast with INVISIBLE TRADE.

Invisible Trade EXPORTS and IMPORTS of things you cannot touch or see: SERVICES, such asbanking or advertising and other intangibles, such as copyrights. Invisible tradeaccounts for a growing slice of the value of world trade.

Wage Drift The difference between basic pay and total earnings. Wage drift consists of thingssuch as overtime payments, bonuses, PROFIT share and performance-related pay.It usually increases during periods of strong GROWTH and declines during aneconomic downturn.

World Bank An institution created with the IMF at BRETTON WOODS in 1944 and opened in1946. The World Bank has three main branches: the International Bank forReconstruction and Development (IBRD), the International Development Agency(IDA) and the International Finance Corporation (IFC).

X-efficiency Producing OUTPUT at the minimum possible cost.Zero Sum Game When the gains made by winners in an economic transaction equal the losses

suffered by the losers. It is identified as a special case in GAME THEORY. Mosteconomic transactions are in some sense positive-sum games. But in populardiscussion of economic issues, there are often examples of a mistaken zero-summentality, such as “PROFIT comes at the expense of WAGES”, “higherPRODUCTIVITY means fewer jobs”, and “IMPORTS mean fewer jobs here”.

Yield Curve Shorthand for comparisons of the INTEREST RATE on GOVERNMENT BONDSof different maturity.

Free Trade Areavis-à-vis CommonMarket(UPSC 2006)



Forward CurrencyMarket(UPSC 2006)Offshore CurrencyMarket(UPSC 2006)Agri-Trade(UPSC 2006)CEMA Bloc(UPSC 2006)Crude Prices(UPSC)GandhianEconomy(UPSC)Second GreenRevloution(UPSC)Kasturba GandhiBalika VidyalayaYojana(UPSC)Euro-Control(UPSC)Blue tooth(UPSC)MFN Status toIndia by Pakistan(UPSC)The Notion ofdevelopment ofUnderdevelopment(UPSC)Green GDP(UPSC)

Green Gross Domestic Product (Green GDP) is an index of economic growth withthe environmental consequences of that growth factored in.

Terms of referenceof Abid HussainCommittee(UPSC)Agreement onAgriculture (AOA)of WTO(UPSC)SLRCRRRepo Rate The reverse repo rate is the rate at which banks park their short-term excess



liquidity with the RBI, while the repo rate is the rate at which the RBI pumps inshort-term liquidity into the system

Reverse RepoBank RateMinimumAlternate Tax(UPSC)CENVATMODVAT Schemeof 1986(UPSC)VAT(UPSC)Objectives of PlantVarieties RightsAct 2002(UPSC)How is HDI forLife Expectancymeasured?(UPSC)Objectives of 12th

FinanceCommission(UPSC)

The Finance Commission is constituted to define financial relations between theCenter and the States. Under the provision of Article 280 of the constitution, thePresident appoints a Finance Commission for the specific purpose of devolution ofnon-plan revenue resources. The functions of the Commission are to makerecommendation to President in respect of:1. The distribution of net proceeds of taxes to be shared between the union and thestates and the allocation of share of such proceeds among the states.2. The principles which should govern the payment of grant-in-aid by the Center toStates.3. Any other matter concerning financial relations between the Center and theStates.

Contribution ofPrimary,Secondary &Tertiary Sector inIndia’s GDP(UPSC)Objective of SEBI(UPSC)Deficit Financing(UPSC)Plan Holiday(UPSC)

When national planning is given a break. During plan holiday, only annual plansare implemented. The reason is that the state would not be in a position to makefinancial commitments for more than a year. Eg. in India it was adopted during1966-1969 & from 1990-1992.

Competition Act The act provide for establishment of a Commission to prevent practices having



2002(UPSC)

adverse effect on competition, to promote and sustain competition in markets, toprotect the interests of consumers and to ensure freedom of trade carried.

FRBM Act · The revenue deficit as a ratio of GDP should be brought down by 0.5 per centevery year and eliminated by 2007-08;

· The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent everyyear and brought down to 3 per cent by 2007-08;

· The total liabilities of the Union Government should not rise by more than 9per cent a year;

· The Union Government shall not give guarantee to loans raised by PSUs andState governments for more than 0.5 per cent of GDP in the aggregate;

Buy back ofShares(UPSC)Why wasJanashree BimaYojana Introduced(UPSC)

The scheme provides life insurance protection to the rural and urban poor personsbelow poverty line and marginally above the poverty line. The premium under thescheme is Rs.200/-per annum per member. 50% of the premium i.e. Rs.100/- willbe contributed by the member and/or Nodal Agency/State Government and thebalance 50% will be born by the Social Security Fund.

AgricultureInsuranceCorporation

Agriculture Insurance Company of India Limited (AIC) has been formed by theGovernment of India in 2002-03 “to subserve the needs of farmers better and tomove towards a sustainable actuarial regime, it was proposed to set up a newCorporation for Agriculture Insurance”. GIC (35 %) & NABARD (30%) hold 65% stake in the company

Govt Policy onChild LabourObjectives ofNational HealthPolicy 2002(UPSC)OperationBlackboardScheme

The scheme of Operation Blackboard was launched in 1987 in pursuance ofNational Policy on Education, to provide minimum essential facilities to allprimary schools in the country. It was formulated with an assumption that theimprovement in school environment would increase the enrolment rate, retentionrate and attainment levels of primary school children.

Differential Rateof Interest Scheme(UPSC)

Government of India had formulated in March, 1972 a scheme for extendingfinancial assistance at concessional rate of interest @ 4% to selected low incomegroups for productive endeavours initially by public sector banks and then byprivate sector banks also. The scheme known as Differential Rate of InterestScheme (DRI) is now being implemented by all Scheduled Commercial Banks.

Major items ofexpenditure onIndia’s RevenueAccount(UPSC)Pradhan MantriGram SadakYojana



(UPSC)Peak Rate ofCustom Duty(UPSC)

Union budget 2008-09 has kept it unchanged at 10 %.

OGL Open General License. Being a signatory of WTO, by year 2003, India has to putmost of the items under Open General License (OGL) for import which meansthese items can be freely traded.

SEZ(UPSC)RBI’s AutomaticRoute in FDI(UPSC)Objectives ofAnnapurnaScheme(UPSC)SampoornaGramin RojzarYojana(UPSC)Union Budget2002-03recommendedsome services to betaxed. Name any 4.(UPSC)Dumping(UPSC)Capital AccountConvertability(UPSC)

The Tarapore committee set up by the Reserve Bank of India (RBI) in 1997 to gointo the issue of CAC defined it as the freedom to convert local financial assets intoforeign financial assets and vice versa at market determined rates of exchange.CAC has 5 basic statements designed as points of action:1. All types of liquid capital assets must be able to be exchanged freely, between

any two nations, with standardized exchange rates.2. The amounts must be a significant amount (in excess of $500,000).3. Capital inflows should be invested in semi-liquid assets, to prevent churning

and excessive outflow.4. Institutional investors should not use CAC to manipulate fiscal policy or

exchange rates.5. Excessive inflows and outflows should be buffered by national banks to

provide collateral.Current AccountConvertibility ofRupee(UPSC)

Current account convertibility allows free inflows and outflows for all purposesother than for capital purposes such as investments and loans. In other words, itallows residents to make and receive trade-related payments — receive dollars (orany other foreign currency) for export of goods and services and pay dollars forimport of goods and services, make sundry remittances, access foreign currency fortravel, studies abroad, medical treatment and gifts etc. In India, current account



convertibility was established with the acceptance of the obligations under ArticleVIII of the IMF’s Articles of Agreement in August 1994.

Sex Ratio of India(UPSC)Ad Valorem &Specific Duties(UPSC)Zero BasedBugeting(UPSC)

Zero-based Budgeting requires that a program be justified from the ground up eachfiscal year. ZBB is especially encouraged for Government budgets becauseexpenditures can easily run out of control if it is automatically assumed what wasspent last year must be spent this year

CRISIL(UPSC)ProvidingIndustry Status toAgriculture(UPSC)Operation Flood(UPSC)Couple ProtectionRatio(UPSC)HDI & GenderRelatedDevelopmentIndex(UPSC)Green GNP(UPSC)Hard Currency &Soft Currency(UPSC)Misery Index(UPSC)Per Capita Income(UPSC)Objectives ofSocial Security(UPSC)Parallel Economy(UPSC)Command AreaDevelopment(UPSC)Objectives ofNABARD(UPSC)



11th FinanceCommission(UPSC)Census Definitionof Urban Areas(UPSC)Objectives of NewEconomic Policy ofGoI (UPSC)Rao-Manmohanmodel ofdevelopment(UPSC)Mid-day MealScheme(UPSC)MoU A memorandum of understanding (MOU or MoU) is a document describing a

bilateral or multilateral agreement between parties. It expresses a convergence ofwill between the parties, indicating an intended common line of action.

MonetaryAggregates

M1 - Consists of currency with the public (ie notes & coins in circulation minuscash with the banks) plus demand deposits with the bank (deposits which can bewithdrawn without notice) plus other deposits with RBI (usually negligible). Alsocalled narrow moneyM2 - M1 + saving deposits + Certificate of Deposits (CDs) + term depositsmaturing within a year.M3 - M2 + term deposits with maturity more than a year + term borrowing ofbanking system. Also known as broad money.

LiquidityAggregates

Over & above the monetary aggregates the Reddy Committee also recommendedLiquidity aggregates which includesL1 M3 + all Deposits with the Post Office Savings Banks (excluding NationalSavings Certificates)L2 L1 + Term Deposits with Term Lending Institutions and RefinancingInstitutions (FIs) + Term Borrowing by FIs+ Certificates of Deposit issued byFinancial Institutions; andL3 L2 + Public Deposits of Non-Banking Financial Companies

Mode of ServicesUnder GATT

Mode 1 - Cross border trade, this is defined as delivery of a service from theterritory of one country into the territory of other country. No one actually moves –E.g. Postal Services, Telecom Services.Mode 2 - Consumption abroad - this mode covers supply of a service of onecountry to the service consumer of any other country through temporary relocationof consumer. E.g. Education abroad, Tourism etc.Mode 3 - Commercial presence - which covers services provided by a servicesupplier of one country in the territory of any other country. E.g. Banks, Hospitalsowned by Foreign Firms.Mode 4 - Presence of natural persons - which covers services provided by a servicesupplier of one country through the presence of natural persons in the territory ofany other country. E.g. Doctors, IT Professionals etc.



Revenue Deficit(UPSC)

Difference between revenue expenditure & revenue receipts

Budget Deficit Difference between total expenditure & revenue receiptsFiscal Deficit(UPSC)

Budget deficit plus non debt creating capital receipts.Fiscal Deficit = Total Expenditure – Revenue Receipts – Non Debt CreatingCapital Receipts (E.g. Disinvestment, Recorvery of NPAs, Sale of Assets etc).Therefore if Total Expenditure is more, it will lead to positive fiscal deficit whichis bad beyond a certain point.

Primary Deficit Fiscal deficit – Interest Payments.Monetized Defict Deficit Financing through printing currency.Ways & MeansAdvances

Vajiram Notes.

ImperativePlanning

Type of planning where the central planning authority decides about every aspectof the economy and the targets set & the processes delineated to achieve them areto be strictly followed. This type of planning is mainly practiced in socialisteconomies.

IndicativePlanning

A system of planning in which the state sets the broad parameters and goals for theeconomy. The state only broadly indicates the targets to be achieved. It wasadopted in India since the 8th Five Year plan & is based on the model beingpracticed by many developing countries.

PerspectivePlanning

It is planning for a long period of time usually 15-20 years. As a highly specializedtasks it is operationalized through 5 year plans & annual plans.

Rolling Plan Under the technique of rolling plans, there are three plans. First, there is plan forthe current year which includes the annual budget. Second, there is aplan for afixed number of years say three or four or five. It is changed every year in keepingwith the requirements of the economy. Third there is a perspective plan for 10, 15or 20 years.

Millenium Development Goals (MDGs to be achieved by 2015)1. Eradicate extreme poverty and hunger2. Achieve universal primary education3. Promote gender equality and empower women4. Reduce child mortality5. Improve maternal health6. Combat HIV/AIDS, malaria, and other diseases7. Ensure environmental sustainability8. Develop a global partnership for development

FERA FEMAViolation of FERA was a criminal offence. Violation of FEMA is a civil wrong.Offences under FERA were not compoundable. Offences under FEMA are compoundable.Penalty was 5 times the amount involved. Penalty is 3 times the sum involved.Citizenship was a criteria to determine residentialstatus of a person under FERA.

Stay in India for more than 182 days is thecriteria to decide residential status.



There was only one Appellate Authority namelyForeign Exchange Regulation Appellate Board.

There are two appellate authorities namely1. Special Director (Appeals) and2. Appellate Tribunal for Foreign Exchange.

Topics to be covered from here onlySPI Social Progress Indicator which is defined at the individual level in 3

dimentions.1. Longevity of life2. Consumption of private goods3. Access to public goods such as clean water, sanitation, safety, transport

etcGPI Genuine Progress Indicator. It includes more than 20 aspects of our economic

life that GDP ignores. The value of activities that add to human progress areadded and those which reduce progress are subtracted from the measure. Thelater set of activities include crime, defense expenditure, degradation ofresources etc.

Green Index The World Banks environmentally sustainable development division hasdeveloped this index which attached dollar value to each of the belowmentioned components:

1. Produced assets2. natural resources3. human resources

It then estimates the true estimate of the country’s wealth taking into accountall such resources which do not always show up on traditional economicindicator.

Self Sufficiency & SelfReliance

Self sufficiency refers to a situation where a country would be producing all thegoods it requires. Imports are completely ruled out.Self reliance is a situation where the country has the capacity to pay for itsimports.

Rupee Payment Area Consists of those countries where rupee was used as a vehicle currency i.e. fortransaction. It includes mainly soviet union countries where the loan is repaidonly through exports & not in terms of payment of cash.

Rupee Debt Is loan raised from rupee payment area countries which has to be servicedthrough exports.

Components ofExternal Debt ofIndia

1. Multilateral Assistance2. Bilateral Assistance3. IMF4. NRI Deposits (Long Term)5. Export Credit6. ECBs7. Rupee Debt8. Short Term Debt.

Fiscal Drag A situation where inflation pushes income into higher tax brackets – bracketcreep. The result is increase in income taxes but no increase in real purchasingpower. This is a problem during periods of high inflation. Government gainsdue to higher tax collections & the economy suffers as growth is dragged down



due to less demand. In high growth & high inflation economies (i.e.overheated), fiscal drag acts as automatic stabilizer as it acts naturally to keepthe demand stable.

Excise Duty Excise duty is imposed on the manufacturer of excisable products and is leviedon a wide variety of commodities manufactured in India. This duty is animportant source of revenue for the central government. Rates vary dependingon the type of commodity, and even for the same type of commodity the ratesoften differ depending on circumstances such as end-use and taxability ofinputs. Although generally ad valorem, the rates may also be specific or acombination of ad valorem and specific.

Custom Duty Customs duties are levied on commodities imported into India. However,drawbacks may be available if the imported items are reexported or used inmanufacture for export. Customs duty is also imposed on the value of certainexports. Customs duties, particularly on imports, may be a significant costfactor in an Indian project due to the generally high rates of duties, unlesscorresponding drawbacks are available upon export.

Bonus & Rights Issue Bonus Issue: An offer of free additional shares to existing shareholders. Acompany may decide to distribute further shares as an alternative to increasingthe dividend payout. Also known as a "scrip issue" or "capitalization issue".New shares are issued to shareholders in proportion to their holdings. Forexample, the company may give one bonus share for every five shares held. Nonew funds are raised with a bonus issue.

Rights Issue: Issuing rights to a company's existing shareholders to buy aproportional number of additional securities at a given price (usually at adiscount) within a fixed period. Rights are often transferable, allowing theholder to sell them on the open market.

Primary Secondary &Tertiary Sector

Primary SectorThe primary sector of the economy extracts or harvests products from the earth.Types of industry in the primary sector are:

1. Farming - the production of food2. Mining – mining metals and minerals3. Fishing – catching and gathering food from seas, rivers and lakes4. Forestry – growing and managing forests for wood production

In India, primary sector accounted for 16.6% of the GDP in 2007, employed60% of the total workforce and despite a steady decline of its share in the GDP,is still the largest economic sector and plays a significant role in the overallsocio-economic development of India

Secondary Sector:The secondary sector processes the raw materials from the primary sector. Thismeans that they take the raw materials and make them into finished items.Types of industry in the secondary sector are:

1. Food and drink - processing raw foodstuffs, such as making wheat intobread.

2. Manufacturing cars



3. BuildingIn India secondary sector accounts for 27.6% of the GDP and employ 17% ofthe total workforce.

Tertiary Sector:The tertiary sector of the economy is the service industry. This sector providesservices to the general population and to businesses. Activities associated withthis sector include retail and wholesale sales, transportation and distribution,entertainment (movies, television, radio, music, theater, etc.), restaurants,clerical services, media, tourism, insurance, banking, healthcare, and law.

In India it provides employment to 23% of work force, and it is growing fast,growth rate 7.5% in 1991–2000 up from 4.5% in 1951–80. It has the largestshare in the GDP, accounting for 55% in 2007 up from 15% in 1950.

Informal/UnorganizedSector in India

For statistical purpose, the informal sector is regarded as a group of productionunits, which form part of the household sector as household enterprises orequivalently, unincorporated enterprises owned by households.

On the other hand the unorganised sector refers to those enterprises whoseactivities or collection of data is not regulated under any legal provision or donot maintain any regular accounts. In the unorganised sector, in addition to theunincorporated proprieties or partnership enterprises, enterprises run bycooperative societies, trust, private and limited companies are also covered. Theinformal sector can therefore, be considered as a sub-set of the unorganisedsector.

India: About 370 million workers constituting 92% of the total workforce in acountry were employed in the unorganized sector as per NSS Survey 1999-2000. It plays a vital role in terms of providing employment opportunity tolarge segment of the working force in the country and contributes to thenational product significantly. The contribution of the unorganised sector to thenet domestic product and its share in the total NDP at current prices has beenover 60%.

Social Security inIndia

Social security primarily refers to social welfare service concerned with socialprotection, or protection against socially recognized conditions, includingpoverty, old age, disability, unemployment and others.

Constitution on Social Security:Matters relating to Social Security are listed in the Directive Principles of StatePolicy and the subjects in the Concurrent List. The following social securityissues are mentioned in the Concurrent List (List III in the Seventh Schedule ofthe Constitution of India) –Item No. 23: Social Security and insurance, employment and unemployment.Item No. 24: Welfare of Labour including conditions of work, provident funds,employers’ liability, workmen’s compensation, invalidity and old age pensionand maternity benefits.



Part IV Directive Principles of State PolicyArticle 41 - Right to work, to education and to public assistance in certain casesThe State shall, within the limits of its economic capacity and development,make effective provision for securing the right to work, to education and topublic assistance in cases of unemployment, old age, sickness and disablement,and in other cases of undeserved want.Article 42 - Provision for just and humane conditions of work and maternityrelief. The State shall make provision for securing just and humane conditionsof work and for maternity relief.Discuss various schemes of Government:

Footloose Industries Footloose industry is a general term for an industry that can be placed andlocated at any location without effect from factors such as resources ortransport. These industries often have spatially fixed costs, which mean that thecosts of the products do not change despite where the product is assembled.Diamonds and computer chips are some examples of footloose industries.

Buffer Stock The "buffer stock scheme" is an economic term, referring to the use ofcommodity storage for economic stabilization. Specifically, commodities arebought and stored when there is a surplus in the economy and they are soldfrom these stores when there are shortages in the economy. The stock ofcommodities stored act as a buffer against price volatility. India maintainsbuffer stocks of wheat, rice, sugar, edible oil etc to maintain price stability.

Current Position (May 2008): India purchased 20.5 million tonnes of wheat in2008 from local farmers and is within sight of a record wheat buffer stock thisyear. The buffer stock is maintained by Food Corporation of India.A likely record crop of 76.78 million tonnes in 2008, a result of better seedsand favourable weather conditions, have helped the government build largebuffer stocks at a time it is battling inflation ruling at 3-year highs.Depleted buffer stocks forced India to order expensive imports of 7.3 milliontonnes over the last two years.

Edible Oil – Positionof India

As of 2008, India consumes around 12.5 million tonnes (mt) of edible oilsannually, but the production is estimated to be just 7.24mt.

Integrated WastelandDevelopmentProgram

The Integrated Wasteland Development Programme (IWDP) launched in 1989under the aegis of the National Wasteland Development Board also aimed atthe development of wastelands on watershed basis. Its objective are

1. To facilitate/ attract resources from financial institutions, banks, corporatebodies including users industries and other entrepreneurs for development ofwastelands in non forest areas belonging to central and state governments,Panchayats, village communities, private farmers etc.

2. To promote group of farmers belonging to different communities namely,big, small, marginal and SC/ST for bringing wasteland under productive use.

3. To facilitate production and flow of additional biomass including farm-forestry products used as raw materials inputs for different types of industries.



4. To facilitate employment generation through land development and otherallied land based and related activities including plantations.

Agri-Export Zones With the objective of promoting greater exports of fresh and processedagricultural produce from the country the Government of India (GoI) hasannounced the creation of Agri Export Zone (AEZ). The scheme isimplemented by the Ministry of Commerce, GoI, through APEDA (theAgriculture and Processed Food Export Development Authority), New Delhi –the nodal agency for AEZ. The AEZ is expected to give a focus and directionfor exports of key agricultural produce with potential from the country. Itinvolves a detailed action plan for the development of a specified geographicarea /s for effecting systematically greater exports of a specific produce.

Under the AEZ all aspects of agriculture such as production, research,development, extension, post harvest management and marketing are addressedin a focused manner for successful implementation.

Girard Formula Tariff reduction formula in the area of Non Agriculture Market Access thattakes into account the interests of developing countries by incorporating eachcountry’s average tariff. The Girard Formula is a variation of Swiss Formula.

Inter CorporateDeposits

Apart from Commercial papers, corporates also have access to another marketcalled Inter-corporate deposits (ICD) market. An ICD is an unsecured loanextended by one corporate to another. This market allows fund surpluscorporates to lend to other corporates.

Merchant Banks MBs are those who manage & underwrite new public issues floated bycompanies to raise fund from public. They also provide advisory services tocorporate clients on fund raising.

Angel Investor An investor who invests in a business looking for higher return than possiblefrom traditional investments. They invest their own money unlike a venturecapitalist who invests public money.

NBFC Non Banking Financial Company. NBFCs registered with RBI have beenclassified as

(i) Asset Finance Company (AFC)(ii) Investment Company (IC)(iii) Loan Company (LC)

NBFCs are doing functions akin to that of banks, however there are a fewdifferences:(i) a NBFC cannot accept demand deposits;(ii) it is not a part of the payment and settlement system and as such cannotissue cheques to its customers; and(iii) deposit insurance facility is not available for NBFC depositors unlike incase of banks

NSDL National Securities Depository Limited, the first and largest depository in India,established in August 1996 and promoted by institutions of national statureresponsible for economic development of the country has since established anational infrastructure of international standards that handles most of thesecurities held and settled in dematerialised form in the Indian capital market

Indonext Promoted by BSE, Federation of Indian Stock Exchanges & the regional stockexchanges. The BSE IndoNext would help the investors to reach the BSE



IndoNext traded scrips in addition to the network of BSE, also through thenetwork of about 7,000 members of RSEs, who cater to the investors in the far -flung areas of the country and, thus, contribute to the development of thecapital market.

Clearing House An organization that registers, monitors, matches & guarantees the trades of itsmembers & carries out the final settlement of all future transactions. TheNational Securities Clearing Corporation is the clearing house for the NSE.

Gilt Gild is a bond issued by the government. It is issued by the central bank of acountry on behalf of the government. In India, RBI issues the treasury bills orgilts. Gild Edged market is a the market for government securities.

NCDEX National Commodity & Derivatives Exchange Limited is the national levelonline multi commodity exchange. It offers futures trading in both agricultural& non agricultural commodities.

FMC Forward Markets Commission which is the regulatory authority of forwardmarkets, overseen by he Ministry of Consumer Affairs & Public Distribution.

Primary Dealers RBI introduced system of PDs in government securities market in 1995 withthe objective to strengthen the infrastructure in the government securitiesmarket in order to make it more vibrant, liquid & broad based.

Market Depth It is a dimension of market liquidity & refers to the ability of the market tohandle large trading volumes without significant impact on prices. For example,if the market for a stock is "deep", there will be a sufficient volume of pendingorders on both the bid and ask side, preventing a large order from significantlymoving the price.

Market Breadth The fraction of overall market that is participating in the market’s up or downmove. The great the breadth, the more the companies are participating.

GDP Deflator The GDP deflator is arrived at by dividing the GDP at current prices by GDP atconstant prices in terms of base year prices (1993-94). This indicates how muchgrowth in GDP is due to price rise & how much due to increase in output.

Asset Stripping Selling surplus land or machinery of an industrial undertaking to convert theidle or under utilized asset into cash.

Debt Service Ratio Ratio of a country’s debt service (repayment of principle & interest) as a ratioof its total export earnings.

Free on Board The price of a commodity when it is loaded on to the ship, truck or airplane. Itincludes only the cost of production & transport charges upto the port ofembarkation but does not include insurance or freight.

MaastrichtConvergence

Five conditions that prospective members of EU had to meet before they wereallowed entry into European currency union.

Participation Rate The ratio of labour force to the active population aged (15-65).Transfer Payments Payments made with o expectation of a return of goods or services. E.g. charity,

pension.

Economics

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