Macroeconomics_2010

8/7/2019 Macroeconomics_2010

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MACROMACRO--ECONOMICSECONOMICS


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THE 3 SECTORS OF ECONOMYTHE 3 SECTORS OF ECONOMY PrimaryPrimary agriculture, forestry, fishery,agriculture, forestry, fishery,

animal husbandryanimal husbandry

SecondarySecondary mineral, power, mining,mineral, power, mining,

manufacturing industries.manufacturing industries.

ServicesServices transport, trade,transport, trade,

communication, banking, other servicescommunication, banking, other services


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TYPES OF ECONOMYTYPES OF ECONOMY

Market EconomyMarket Economy

Socialist EconomySocialist Economy

Mixed EconomyMixed Economy


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Indicators of Economic HealthIndicators of Economic Health GDP on PPP basisGDP on PPP basis

Per Capita IncomePer Capita Income Human Development IndexHuman Development Index

Level of EmploymentLevel of Employment B.P.L. PopulationB.P.L. Population


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INDICATORS OF ECONOMYINDICATORS OF ECONOMY

GDPGDP total flow of goods and servicestotal flow of goods and services

produced in a country in one year.produced in a country in one year.

GNP = GDP + income from abroadGNP = GDP + income from abroad

NDP / NNP = GDP / GNPNDP / NNP = GDP / GNP -- depreciationdepreciation

GDPGDP--PPP = GDP based on PurchasingPPP = GDP based on Purchasing

Power ParityPower Parity PCI = Per capita GDPPCI = Per capita GDP


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INDICATORS OF ECONOMYINDICATORS OF ECONOMYWPIWPI -- WHOLESALE PRICE INDEXWHOLESALE PRICE INDEX

Measures increase / decrease in industrial, commercialMeasures increase / decrease in industrial, commercial

prices of commodities under 3 broad categories.prices of commodities under 3 broad categories.

Primary articlesPrimary articles -- 98 items98 items 22% weightage22% weightage

Fuel, power etc.Fuel, power etc. -- 19 items19 items 14% weightage14% weightage

Manufactured productsManufactured products -- 318 items318 items 64% weightage64% weightage

Base yearBase year -- 20042004--0505 Used for calculating INFLATION.Used for calculating INFLATION.

Discussion on to replace this with CPI (consumer price index)Discussion on to replace this with CPI (consumer price index)to calculate inflationto calculate inflation


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CPICPICONSUMER PRICE INDEXCONSUMER PRICE INDEX

Calculates increase / decrease in retail price.Calculates increase / decrease in retail price.

Direct bearing on consumers.Direct bearing on consumers.

Different types of CPIs for various consumers.Different types of CPIs for various consumers.

for agricultural laborers.for agricultural laborers.

for rural laborers.for rural laborers.for industrial workers.for industrial workers.

for urban nonfor urban non--manual employee.manual employee.


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INFLATIONINFLATION

Steady rise in prices, resulting in decline inSteady rise in prices, resulting in decline inpurchasing power of the money.purchasing power of the money.

2 types2 types -- cost push & demand pull.cost push & demand pull. Normally measured in terms of WPI, onNormally measured in terms of WPI, on

YoY basis.YoY basis.

Moderate inflation is good for economy.Moderate inflation is good for economy.


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Factors behind InflationFactors behind Inflation Heavy nonHeavy non--plan expenditure by Govt.plan expenditure by Govt.

High fiscal deficits and deficit financingHigh fiscal deficits and deficit financing

Large parallel economyLarge parallel economy

Fluctuation in agricultural outputFluctuation in agricultural output Govt.Govt.s attempts to bridge deficits bys attempts to bridge deficits by

higher indirect taxeshigher indirect taxes rise in costs.rise in costs.

Increase in Money SupplyIncrease in Money Supply


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HDIHDI -- HUMAN DEVELOPMENT INDEXHUMAN DEVELOPMENT INDEX

Developed by UNDP in 1996Developed by UNDP in 1996

MeasuresMeasures physical quality of lifephysical quality of life in ain acountry along 3 key parameterscountry along 3 key parameters Life expectancy at birthLife expectancy at birth

No. of years in schoolNo. of years in school Per capita incomePer capita income


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POVERTY LINEPOVERTY LINE

Consumption expenditure required for gettingConsumption expenditure required for getting

2100 calories per person in urban area and2100 calories per person in urban area and

2400 calories in rural areas.2400 calories in rural areas.

Key parametersKey parameters

No. of people BPLNo. of people BPL

% of population BPL% of population BPL


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EMPLOYMENTEMPLOYMENT

Standard person year of 273 days. Person working atStandard person year of 273 days. Person working atleast 4 hours a day is considered employed.least 4 hours a day is considered employed.

Drop in employment growth rate in postDrop in employment growth rate in post--reform years,reform years,nearly 1% p.a.nearly 1% p.a.

Manufacturing sector not keeping pace with populationManufacturing sector not keeping pace with populationgrowth in the past.growth in the past.

Mechanisation, computerisation.Mechanisation, computerisation.

Seasonal and disguised unemployment in agri. sector.Seasonal and disguised unemployment in agri. sector. Stringent wage laws adding to involuntaryStringent wage laws adding to involuntary

unemployment.unemployment.


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Monetary PolicyMonetary Policy Who decides this ?Who decides this ?

Central Bank Of a CountryCentral Bank Of a Country

What it aims to achieve?What it aims to achieve? Monetary policy regulates the money supplyMonetary policy regulates the money supplyin an economy.in an economy.


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Tools of Monetary PolicyTools of Monetary Policy

1.1. Bank RateBank Rate2.2. Open market operationsOpen market operations

3.3. CRR and SLRCRR and SLR4.4. Credit ceilingCredit ceiling

5.5.

Differential Interest RatesDifferential Interest Rates


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Tools continuedTools continued

1. Bank Rate1. Bank Rate -- official rate of interestofficial rate of interestcharged by RBI as the lender of lastcharged by RBI as the lender of last

resort. Current rateresort. Current rate

6%6%

2. Open market operations2. Open market operations -- RBI buyingRBI buyingand selling securities to regulate moneyand selling securities to regulate money

supply. Repo ratesupply. Repo rate Rate at which RBIRate at which RBIlends to banks 4.75% . Reverse Repolends to banks 4.75% . Reverse RepoRate at which RBI accepts deposits fromRate at which RBI accepts deposits frombanksbanks -- 3.25%3.25%


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MONETARY POLICYMONETARY POLICY3.3. A) CRRA) CRR-- every commercial bank to keep a certainevery commercial bank to keep a certain

percent of its demand and time deposits with the RBIpercent of its demand and time deposits with the RBI

(5%)(5%) to go up to 5.5% on 13to go up to 5.5% on 13thth Feb 2010 and 5.75%Feb 2010 and 5.75%on 27on 27thth Feb 2010Feb 2010

B) SLRB) SLR-- commercial banks keep a fixed percentage ofcommercial banks keep a fixed percentage of

their demand and time deposits in liquid assets ( cash,their demand and time deposits in liquid assets ( cash,

securities, gold ) currently at 25%securities, gold ) currently at 25% -- raised recently.raised recently.

4.4. Differential Interest Rates ( PLR )Differential Interest Rates ( PLR ) PLRPLR 11.0011.00 12.0012.00

5.5. Priority sector lendingPriority sector lending


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ROLE OF THE RBIROLE OF THE RBI

Issue of bank notes of all denominationsIssue of bank notes of all denominations

Regulates money supplyRegulates money supply

Lender of last resort to banksLender of last resort to banks

Controls FOREX operations.Controls FOREX operations.


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TRADE CYCLETRADE CYCLE

Refers to fluctuation in economic activityRefers to fluctuation in economic activity

which forms a regular pattern.which forms a regular pattern.

Expansionary phase characterized by increaseExpansionary phase characterized by increase

in income, output, employment and inflation.in income, output, employment and inflation.

Contraction phase is characterized by drop inContraction phase is characterized by drop in

income, output , employment and deflation (income, output , employment and deflation (sustained fall in prices).sustained fall in prices).


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BOOMBOOM -- Refers to a particularly sharp upwardsRefers to a particularly sharp upwardsturn in demand and output.turn in demand and output.

RECESSIONRECESSION --Two consecutive quarters of fallingTwo consecutive quarters of fallingGDP in an economy. Beginning of slump orGDP in an economy. Beginning of slump ordepression. Occurs due to over productiondepression. Occurs due to over productionduring earlier phase, rise in fuel and rawduring earlier phase, rise in fuel and rawmaterial prices, etc.material prices, etc.

SLUMPSLUMP -- Severe downSevere down--turn phase. Opposite ofturn phase. Opposite ofboom, e.g., the great US slumpboom, e.g., the great US slump


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DISDIS--INFLATIONARY MEASURESINFLATIONARY MEASURES

Steps taken by govt. to BRING DOWN prices inSteps taken by govt. to BRING DOWN prices in

face of chronic inflation.face of chronic inflation.

STAGFLATIONSTAGFLATION

Decline in economic activity even in face ofDecline in economic activity even in face of

inflation. Production doesninflation. Production doesnt rise even with pricet rise even with price

rise, due to poor infrastructure or high rawrise, due to poor infrastructure or high rawmaterial cost. Mostly seen in LDCs.material cost. Mostly seen in LDCs.


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MONEY MARKETSMONEY MARKETS

Market in short term securities, loans, gold andMarket in short term securities, loans, gold andFOREX. Mainly commercial banks are involved.FOREX. Mainly commercial banks are involved.

InterInter--bank call money market, the mostbank call money market, the mostsignificant part. An oversignificant part. An over--thethe--phone market.phone market.

Basic objectivesBasic objectives To even out short term surpluses and deficitsTo even out short term surpluses and deficits

To provide easy access to short term moneyTo provide easy access to short term money

to meet commercial requirements at a realisticto meet commercial requirements at a realisticprice.price.


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CAPITAL MARKETCAPITAL MARKET

Market for long term loans.Market for long term loans.

Consists ofConsists of a) Govt. securitiesa) Govt. securities

b) Industrial securitiesb) Industrial securities

Govt. securities aimed at bridging fiscal deficitGovt. securities aimed at bridging fiscal deficit

and financing public sector projects. Majorand financing public sector projects. Major

holders are RBI, commercial banks, insuranceholders are RBI, commercial banks, insurance

cos. etc.; captive market for govt. securities.cos. etc.; captive market for govt. securities.


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Industrial securitiesIndustrial securities

Aimed at mobilizing long term funds forAimed at mobilizing long term funds forcorporate to finance capital expenditures,corporate to finance capital expenditures,

e.g. new projects, acquisitions etc.e.g. new projects, acquisitions etc.

Equities market consists of primary andEquities market consists of primary andsecondary markets.secondary markets.

Equity shares traded through stock exchangesEquity shares traded through stock exchangesby brokers in an online environment. BSE andby brokers in an online environment. BSE andNSE the two largest stock exchanges.NSE the two largest stock exchanges.


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STOCK EXCHANGESTOCK EXCHANGE -- an organized market for trading ofan organized market for trading ofstocks and bonds. 22 in India. Facilitate financing forstocks and bonds. 22 in India. Facilitate financing for

corporates.corporates. BSEBSE-- estd. 1875. Oldest in Asia. Getting overshadowedestd. 1875. Oldest in Asia. Getting overshadowed

by newer NSE. 4000 listed companies. Sensexby newer NSE. 4000 listed companies. Sensex

represents top 30 companies.represents top 30 companies.

NSENSE --Also located in Mumbai. NiftyAlso located in Mumbai. Nifty top 50 companiestop 50 companieson total market cap basis.on total market cap basis.

SEBISEBI-- estd. 1992. Regulates working of stockestd. 1992. Regulates working of stockexchanges, brokers and mutual funds. Registers FPIexchanges, brokers and mutual funds. Registers FPI(foreign portfolio investment).(foreign portfolio investment).


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BANKING SECTOR IN INDIABANKING SECTOR IN INDIA

RBIRBI-- guides, controls and regulates other commercialguides, controls and regulates other commercialbanks. Formulates monetary and credit policies.banks. Formulates monetary and credit policies.

COMMERCIAL BANKSCOMMERCIAL BANKS-- mobilize savings and lend tomobilize savings and lend toborrowers ensuring maximum possibleborrowers ensuring maximum possiblespread ratespread rate..

They keep demand deposits ( current a/c), savingsThey keep demand deposits ( current a/c), savingsdeposits and time deposits ( FDs). Nationalised indeposits and time deposits ( FDs). Nationalised in1969 & in 1980. These include1969 & in 1980. These include

A) PSU banks ( 7 SBI group + 19 nationalized )A) PSU banks ( 7 SBI group + 19 nationalized )

B) Pvt. Sector banks ( Indian and foreign )B) Pvt. Sector banks ( Indian and foreign )


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Current AccountCurrent Account

11--(Import + Export) of goods and services(Import + Export) of goods and servicesand unilateral transfers.and unilateral transfers.

22--Trade in goods.Trade in goods.

33--Trade in Services.Trade in Services.


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Capital AccountCapital Account

Private transactionsPrivate transactions

Official transactionsOfficial transactions

Direct investmentsDirect investments

Portfolio investmentsPortfolio investments


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Fiscal PolicyFiscal Policy

Who determines this?Who determines this?

Finance Ministry/ Budget officeFinance Ministry/ Budget office

What exactly is this?What exactly is this?

The part of govt. policy which is concernedThe part of govt. policy which is concerned

with raising revenues through taxation andwith raising revenues through taxation and

deciding on the level and patterns ofdeciding on the level and patterns ofexpenditure ( union budget).expenditure ( union budget).


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Tools of Fiscal PolicyTools of Fiscal Policy

1.1. Level of taxationLevel of taxation2.2. Structure of taxationStructure of taxation

3.3. Control of govt. expenditureControl of govt. expenditure4.4. Subsidies and price controlsSubsidies and price controls

5.5. Export/ Import RestrictionsExport/ Import Restrictions


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STRUCTURE OF UNION BUDGETSTRUCTURE OF UNION BUDGET

REVENUE SIDEREVENUE SIDE

1. Revenue receipts1. Revenue receipts

A) 70%A) 70% -- tax revenuetax revenue central excise, customs duty,central excise, customs duty,corporation tax, income tax, service tax, FBT, STT etc.corporation tax, income tax, service tax, FBT, STT etc.

B) 20%B) 20% -- nonnon--tax revenuetax revenueinterest receipts on loans ,interest receipts on loans ,profits from PSUs.profits from PSUs.

2. Capital receipts2. Capital receipts

10%10% -- Principal repayment from debtors, disinvestmentPrincipal repayment from debtors, disinvestmentproceeds , market borrowings.proceeds , market borrowings.


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STRUCTURE OF UNION BUDGETSTRUCTURE OF UNION BUDGET

EXPENDITURE SIDEEXPENDITURE SIDE

1. Plan expenditure1. Plan expenditureincurred in central development schemes. Costsincurred in central development schemes. Costsaround 25% of total expenditure.around 25% of total expenditure.

-- Revenue and CapitalRevenue and Capital

2. Non2. Non--plan expenditureplan expenditure

Interest payments, defence, subsidies, salary of govt.Interest payments, defence, subsidies, salary of govt.

employees.employees.Accounts for approx. 75% of total expenditure.Accounts for approx. 75% of total expenditure.


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DEFICITSDEFICITS

Revenue deficitRevenue deficit

Revenue expenditure ( interest + subsidy + defenseRevenue expenditure ( interest + subsidy + defense

+ law and order)+ law and order) revenue receiptsrevenue receipts( tax + non tax)( tax + non tax)

Budget deficitBudget deficitTotal expenditureTotal expenditure -- total receiptstotal receipts

Fiscal deficitFiscal deficit

Budget deficit + borrowings from banks and publicBudget deficit + borrowings from banks and public


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DEFICIT FINANCING AND IMPACTDEFICIT FINANCING AND IMPACT

Govt. borrows from RBI by transferring securities. RBIGovt. borrows from RBI by transferring securities. RBIprints new currency and puts it into circulation on behalfprints new currency and puts it into circulation on behalf

of the govt.of the govt. increases money supply. Adds inflationary pressure inincreases money supply. Adds inflationary pressure ineconomy.economy.

In some countries, market borrowing is also termed asIn some countries, market borrowing is also termed asdeficit financing.deficit financing.

evacuates funds available for pvt. investors. Also,evacuates funds available for pvt. investors. Also,

Govt. ends up paying more interest in future.Govt. ends up paying more interest in future.Development expenditure takes back seat.Development expenditure takes back seat.


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TAXESTAXES

DIRECT TAXESDIRECT TAXES

Direct incidence of tax on the person who pays the tax.Direct incidence of tax on the person who pays the tax.

liability to pay tax is NOT passed on to someone else.liability to pay tax is NOT passed on to someone else.e.g. INCOME TAX, CORPORATION TAX, WEALTH TAX,e.g. INCOME TAX, CORPORATION TAX, WEALTH TAX,LAND REVENUE, GIFT TAX etcLAND REVENUE, GIFT TAX etc..

INDIRECT TAXESINDIRECT TAXES

Levied on goods and services. traders / producers pay it.Levied on goods and services. traders / producers pay it.Liability passed on to end customer. e.g. VAT, EXCISELiability passed on to end customer. e.g. VAT, EXCISE

TAX, CUSTOMS DUTY, SERVICE TAXTAX, CUSTOMS DUTY, SERVICE TAX

Macroeconomics_2010

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