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CHAPTER 1 - BASICS OF DEMAND AND SUPPLY AND FORMS OF MARKET COMPETITION

1.1. DEFINITION OF DEMAND Demand refers to the quantity of a commodity that a consumer desires to have, backed up by sufficient resources and willingness to spend those resources on the commodity during a period at various possible prices. Demand Quantity Demand It is the quantity of a commodity that a It is the quantity of a commodity that a consumer is willing to buy at various consumer is willing to buy at a specific possible prices during a period. price at a particular time. It is a flow concept. It is a stock concept. Ex- 20,000 units of Car was demanded in Ex-10 kg of Wheat was demanded at a January price of Rs 40 DEMAND SCHEDULE It is a table related to price and quantity demanded. Types of Demand Schedule Price Individual Demand Market Demand A B MD [ A+B ] 10 5 4 9 20 3 2 5 30 2 1 3

The individual demand schedule refers to the demand schedule of an individual consumer. The market demand schedule refers to the demand schedule of all the consumers in the market. It shows different quantities of a commodity that all consumers in the market, intend to buy at different possible prices, during a period. Market demand is the sum total of Individual demand. DEMAND CURVE It is a graphical presentation of the demand schedule. It is a curve that shows various quantities demanded at various possible prices. The individual demand curve is a graphical presentation of the Individual demand schedule. The market demand curve is a graphical presentation of the market demand schedule. The market Demand curve is the horizontal summation of the individual demand curve.

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100 80 60 A B A+B 40

Price 20 0 10 20 30 40 50 Quantity Demanded

1.2. SLOPE OF DEMAND CURVE 1. The demand curve is a downward sloped curve also known as a negative slope. 2. The demand curve is downward sloped because of the inverse relationship between price and quantity demanded of the commodity.

Slope of a Curve = ∆ Y axis Slope of Demand curve = ∆ P ∆ X axis ∆ QD 1.3. DEMAND EQUATION

QD = Quantity Demand

P = Price

a = It indicates the Quantity Demand at zero price. QD = a – bP b = It indicates the rate at which Quantity Demand changes in

response to change in price. b = ∆QD / ∆P, it being constant value makes the demand curve a straight line. The negative sign shows the inverse relation between P and QD 1.4. LAW OF DEMAND

• “There is an inverse relation between price of a commodity and its quantity demand” LAW • The law states that keeping all other factors constant there is inverse OF DEMAND relation between price of a commodity and its quantity demanded. With the increase in price, quantity demanded decreases and vice- versa.

ASSUMPTIONS / LIMITATIONS OF LAW 1. All the factors other than price are kept constant. 2. All the units of the goods are homogenous. 3. Commodity should be a normal good. 1.4.1. REASONS BEHIND LAW OF DEMAND / INVERSE RELATION BETWEEN PRICE AND DEMAND 1. Income effect (Real Income of the consumer)- Real income refers to the purchasing power or buying capacity of a consumer. With the decrease in the price of a

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commodity, there is an increase in consumer's real income and he can buy more quantity of a commodity by spending the same amount. 2. Substitution effect- With the decrease in the price of the main commodity, it becomes relatively cheaper than its available substitutes. A rational consumer starts consuming more quantity of the main commodity whose price has fallen instead of available substitutes. This is known as the Substitution effect. 3. New consumer- When the price of a commodity decreases, many new consumers start consuming it as they can now afford it. 4. Many uses of a commodity- Several commodities have multiple uses. When the price of these commodities decreases, the consumer starts buying more quantity of it as it can be put to every possible use. This increases the quantity demanded of that commodity when its price falls. 5. Law of Diminishing Marginal Utility- The law states that as more and more units of a commodity are consumed, the marginal utility derived from each successive unit starts decreasing. The demand curve is downward sloping because of the law of diminishing marginal utility. Since additional units of a commodity give a consumer less satisfaction, additional units will be demanded at a lower price. 1.4.2. EXCEPTIONS TO LAW OF DEMAND 1. Necessity goods- These are those goods that are consumed by consumers regardless of their price in the market. These are consumed even at a higher price. Hence, the law of demand doesn't operate in case of necessity goods. 2. Articles of Distinction- These goods are very expensive and are used by the rich and elite class. They demand these goods to maintain their prestige and status in the society. With the increase in the price of these, their demand increases, and vice versa. Hence, the law of demand doesn't operate on these goods. 3. Expected future price- If there is an increase in the price of a good and the consumer expects the price to rise even further, he will increase the quantity demanded of that good is present. On the other hand, if there is a decrease in the price of a good and consumer expects the price to fall even further in the future, he will decrease the quantity demanded of that good in present. In both, the cases Law of demand doesn't hold good. 4. Giffen goods- Giffen goods were identified by British economists Robert Giffen. Giffen goods have 2 characteristics, firstly these goods are of very poor quality, and secondly, a major part of consumer's income is spent on these goods. In the case of Giffen goods, the income effect is negative and the substitution effect is positive. The income effect is so strong that it overrules the substitution effect. Hence with the fall in the price of a good, its quantity demanded also decreases. When the price of such a commodity decreases, the consumer’s purchasing power increases. Due to this he reduces his consumption of Giffen goods and diverts his income on other expensive goods. Hence the law of demand doesn't work on Giffen goods. Ex – Bajra and Jowar are Giffen goods. Wheat is a normal good.

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1.5. DEMAND FUNCTION It shows the functional relationship between the demand for a commodity and the factors affecting it. It shows the dependency of demand on these factors. These Factors are also known as factors affecting demand or Determinants of demand

D (f) = [ Px , Pr , Y, T, Ex, N, DY, W ]

1.5.1. FACTORS AFFECTING DEMAND / DETERMINANTS OF DEMAND

Price of Commodity [Px] •There is an inverse relationship between price of a commodity and its quantity demanded. With the increase in price, quantity demanded decreases and vice versa.

Price of Related Goods [Pr] •Demand for a commodity is also influenced by change in price of related goods. Related goods are of 2 types- •1. Substitute goods •Substitute goods are competing goods and they have a tendency of replacing each other. •Due to increase in price of substitute goods there is increase in the demand of main commodity and vice versa. There is positive relation between price of substitute goods and demand of main commodity. •2. Complimentary goods •Complementary goods are used together. They complete the demand for each other. •Due to increase in price of complementary goods there is decrease in the demand of main commodity and vice versa. There is inverse relation between price of complimentary goods and demand of main commodity. Income level of Consumer [Y] •Change in the income of the consumer influence the demand for different goods. •Normal goods are the goods which are of better quality. Demand for these goods will increase with the increase in level of income of a consumer. •There is positive relation between consumer’s income and demand of normal goods. •Inferior goods are the goods which are of low quality. Demand for these goods will decrease with increase in level of income of a consumer. •There is inverse relation between consumer's income and demand of inferior goods. Taste and Preference [T] •Demand for those goods increases for which consumer develop strong taste and preference. If taste or preference for a product is fading (decreasing) its demand will decrease.

Expected Future Price [Ex] •If consumer expect price of a commodity to rise in the future then he will increase the demand for that commodity in present and if consumer expects the price to fall in the future then he will decrease the present demand.

Number of Buyers/ Population Size[N] •Increase in number of buyers will increase the demand for the good in the market. If size of population will be greater then there will be more demand for goods and services in that market.

Distribution of Income [DY] •If distribution of income is equal, then there will be more demand for goods in the market. As more people would be able to buy the goods. On the other hand in case of unequal distribution of income, demand will be less as only few people will have purchasing power. Season and Weather [W] •Season and weather conditions also affect the market demand for a commodity. Example – During Winter, demand for woolen clothes will increase while in summers it will decrease.

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1.6. CHANGE IN DEMAND AND CHANGE IN QUANTITY DEMANDED

Change In Demand Change In Quantity Demand It is also known as Shift in Demand It is also known as the Movement along Curve. the Demand Curve. It is due to the change in factors other It is due to a change in price, other than price, price kept constant. factors are kept constant.

15 15

10 10 Price 5 Price 5

0 0 1 2 3 4 5 6 1 2 3 4 5 6 Quantity Quantity

Demanded The rightward shiftDemanded in the demand curve Downward movement along the demand shows an increase in demand. curve shows the Expansion in demand. Reasons behind Rightward shift – The reason behind the Downward 1.Increase in Price of Substitute good Movement is Decrease in Price. 2.Decrease in Price of Complimentary good. 3.Increase in Consumer’s Income 4.Favorable change in Taste and Preference 5.Increase in Expected Future Price 6.Increase in Population 7.Equal Distribution of Income

14 14 12 12 10 10

8 8

6 6 4 4 2

Price 2 0 Price 0 1 2 3 4 5 6 1 2 3 4 5 6 Quantity Demanded Quantity Demanded

A leftward shift in the demand curve Upward movement along the demand shows a Decrease in demand. curve shows Contraction in Demand. Reasons behind leftward shift – The reason behind Upward Movement is 1.Decrease in Price of Substitute good Increase in Price. 2.Increase in Price of Complimentary good. 3.Decrease in Consumer’s Income 4.Unfavorable change in Taste and Preference 5.Decrease in Expected Future Price 6.Decrease in Population 7.Unequal Distribution of Income

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1.7. ELASTICITY OF DEMAND The elasticity of demand measures the extent to which demand for commodity changes in response to changes in any of the factors affecting it. It shows the responsiveness of demand to the change in factors affecting demand. The elasticity of Demand is a Quantitative Statement, whereas the Law of Demand is a Qualitative Statement. 1.7.1. PRICE ELASTICITY OF DEMAND It refers to the responsiveness of quantity demand of a commodity due to a change in the price of the commodity. It is the measurement of the percentage change in quantity demand in response to the percentage change in the own price of the commodity. METHODS OF CALCULATING PRICE ELASTICITY OF DEMAND

PERCENTAGE METHOD -

Ed = (-) % Change in Quantity Demanded % Change in Price

PROPORTIONATE METHOD -

Ed = (-) ∆QD * OP ∆ P OQD

Negative sign occurs due to inverse relation between Demand and Price. When price of a commodity decreases, demand for the commodity will increase, and vice-versa. However, conventionally we ignore the negative sign and treat elasticity as a positive value.

RELATIONSHIP BETWEEN SLOPE OF DEMAND CURVE AND PRICE ELASTICITY OF DEMAND

Slope of Demand curve Ed = Elasticity of Demand = ∆ P (-) ∆ QD * OP = 1 * OP ∆ QD ∆ P OQD Slope OQD

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TYPES OF PRICE ELASTICITY PERFECTLY INELASTIC DEMAND E = 0 It refers to the demand that does not change in response to change in 40 d price 30

20 Price 10

0 0 10 20 30 Quantity Demanded

RELATIVELY INELASTIC DEMAND Ed < 1 It refers to the demand when a proportionate change in demand is 40 relatively less than a proportionate change in price. 30

20 Price 10

0 0 20 40 60 Quantity Demanded

UNIT ELASTIC DEMAND E D = 1 It refers to the demand when a proportionate change in demand is 50 equal to a proportionate change in price. 40

Price 30 20 10 0 10 20 30 40 Quantity Demanded

RELATIVELY ELASTIC DEMAND Ed > 1 It refers to the demand when a proportionate change in demand is 25 relatively more than a proportionate change in price. 20

Price 15 10 5 0 0 20 40 60 Quantity Demanded

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PERFECTLY ELASTIC DEMAND E D = Infinity A small rise in price results in a fall in demand to zero. 25 While a small fall in price causes an increase in demand for infinity. 20

15 Price 10 5 0 10 20 30 40 Quantity Demanded

FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

Nature of Commodity • Goods consumed by consumers can be classified as necessity and luxurious goods. • Necessity goods have inelastic demand as their demand is not affected by change in its price. Ex- Salt. Whereas luxurious goods have elastic demand as with the increase in their prices, consumer decrease the demand for these goods. Ex- Car Availability of Substitutes • Demand for goods that have close substitutes are relatively elastic, because when price of main commodity increases, the consumers have an option of shifting to its substitute good. Ex- Tea and Coffee. • Demand for goods without close substitutes are generally inelastic. Ex-Water & Petrol Habitual Goods • Commodity to which a consumer becomes habitual will have inelastic demand. Ex- Alcohol. Whereas, commodity to which a consumer is not habitual will have elastic demand. Ex- Soft drink Portion of Income spent on the good • Commodity on which consumer spends major portion of their income will have elastic demand, as any percentage change in price of such a commodity will have larger impact on consumer's overall budget. Therfore he will decrease the quantity demanded in larger proportion. Ex- Clothes & Car. On the other hand, the commodity on which smaller portion of consumer's income is spent will have inelastic demand. Ex- Newspaper & Toothpaste Multiple Usage of a commodity • Commodities having variety of usage have relatively elastic demand. While, those having few usage have relatively inelastic demand. Example- Electricity has multiple use. If its price increases it will be restricted to important purpose only, other uses may be abandoned. Matchstick has single use. Increase in its Price will not affect its demand.

Postponement of Use • Demand will be elastic for goods whose consumption can be postponed. Example- Demand for vehicle loan is high when rate of interest is low and demand is low when interest rate is high.

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1.7.2. INCOME ELASTICITY OF DEMAND Income elasticity of demand refers to the responsiveness in the quantity demand of a certain good to a change in the real income of consumers, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.

Ed = % Change in Quantity Demand of X % Change in Income Depending on the values of the income elasticity of demand, goods can be broadly categorized as inferior goods and normal goods. Inferior goods have a negative income elasticity of demand; as consumers' income rises, they buy fewer inferior goods. Normal goods have a positive income elasticity of demand; as income rises, more goods are demanded at each price level. 1.7.3. CROSS ELASTICITY OF DEMAND The cross elasticity of demand measures the responsiveness in the quantity demand of one good when the price for other good changes. This measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good.

Ed = % Change in Quantity Demand of X % Change in Price of Y Substitute Goods The cross elasticity of demand for substitute goods is always positive because the demand for one good increase when the price for the substitute good increases. Complementary Goods Alternatively, the cross elasticity of demand for complementary goods is negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped. 1.8. DEFINITION OF SUPPLY Supply is the quantity of a commodity that a seller is able and willing to sell at various possible prices during a period. It refers to the availability of goods in the market. Supply Quantity Supply It refers to the quantity of a commodity It refers to the quantity of a commodity that a producer is ready to sell at various that a producer is ready to sell at a possible prices during a period. specific price at a particular time. It is a flow concept. It is a stock concept. Ex- Total sales by Tata Motors was 2 Ex- Total sales by Tata Motors at a Price lac units of Rs 4 lac was 70000 units

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SUPPLY SCHEDULE It is a tabular presentation that shows the various quantity of supply at various possible prices. TYPES OF SUPPLY SCHEDULE Individual Supply Market Supply Price A B MS [ A+B ] 10 5 8 13 20 8 12 20 30 13 18 31

The individual Supply schedule is a tabular presentation and it shows various quantity supply at various possible prices by an individual seller. The Market Supply schedule is a tabular presentation and it shows various quantity supply at various possible prices by all the sellers in the market. Market Supply is the sum total of Individual Supply. SUPPLY CURVE It is a graphical presentation of the Supply 10 A B A+B schedule. It is a curve that shows the various quantity of supply at various possible prices. 8 6 The Individual Supply curve is a graphical

Price 4 presentation of the Individual Supply schedule. The Market Supply curve is a graphical 2 presentation of the Market Supply schedule. 0 The Market Supply curve is a horizontal 10 20 30 submission of the Individual Supply curve. Quantity Supply 1.9. SLOPE OF SUPPLY CURVE The supply curve is an upward slope curve. The supply curve has a positive slope. The reason behind this is the positive relationship between price and quantity supply of the commodity.

The slope of the Supply curve = ∆ Price ∆ Quantity Supplied

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1.10. LAW OF SUPPLY

It is a • The Law states that keeping other factors constant, when Price of a Fundamental commodity increase, Quantity Supply of the commodity increases and Principal vice versa.

ASSUMPTIONS / LIMITATIONS OF LAW 1. All the factors other than price are kept constant. 1.10.1. EXCEPTIONS TO LAW OF SUPPLY 1. Agriculture Output – Law of supply does not hold good on these goods because agriculture produce is dependent upon natural factors. 2. Goods of Social Distinction – The supply of goods of social distinction will remain limited even if their price increases. 3. Perishable Goods- As the shelf life of perishable goods are small, the producer may be willing to sell these goods even at a lower price. 1.11. SUPPLY FUNCTION It shows the functional relationship between the supply of a commodity and the factors affecting it. It shows the dependency of supply on these factors. These Factors are also known as factors affecting Supply or Determinants of Supply.

Sx = f [ Px, Pr, T, Pf, O, N, G, Ex ] 1.11.1. FACTORS AFFECTING SUPPLY / DETERMINANTS OF SUPPLY

Price of a Commodity [ Px ]

•There is a direct relationship between price of a commodity and its quantity supply. With the increase in price, quantity supply increases. This is due to change in the profit margin, as the price increases keeping other factors constant the profit margin of the commodity increases. This induces the producer to supply more quantity and vice versa.

Price of Related Goods [Pr]

•Supply of a commodity depends upon the price of related goods especially substitute goods. •Increase in the price of a substitute good decreases the supply of main commodity at same price. The producer shifts to the production of substitute good as he assumes to earn more profit from the production and supply of substitute good. •He will be ready to supply same quantity of main commodity only at higher price.

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Technology [T]

• With the improvement in technology cost of production decreases. Decrease in cost of production, increases the profit margin of the producer. So, the producer will increase the supply of the commodity. • Whereas, use of outdated technology decreases the productivity of the producer and increases the cost of production. So, the producer will decrease the supply of commodity.

Price of Factors of Production [Pf]

• Decrease in the price of factors of production, reduces the production cost. Thereby increasing the profit margin and supply of the commodity. • Increase in the price of factors of production will increase the production cost of the producer. This will decraese his profit margin and supply of the commodity.

Objective /Goal of the Firm [O]

• Sales Maximization motive results in more supply at same price by the firm. • Profit maximization motive results in more supply only at high price by the firm.

No. Of Firms[N]

• Increase in the no. of firms increases the supply of a commodity in the market and, • Decrease in number of firms will decrease the supply of a commodity in the market.

Government Policy [G]

• Favorable policies of the Government like increase in subsidy results in increase in the supply of a commodity. • Unfavorable policies of the Government like high taxes results in decrease in supply of the commodity.

Business expectations [ Ex ]

• In situation of Bullish expectation, investment tends to rise and supply of commodity starts rising. • In situation of Bearish expectation, investment tends to decrease and supply of commodity starts decreasing.

Natural Factors

• Favorable natural factor increases production, hence supply of the commodity increases. • Unfavorable natural factor decreases production, hence supply of the commodity decreases.

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1.12. CHANGE IN SUPPLY AND CHANGE IN QUANTITY SUPPLIED

Change in Supply Change in Quantity Supply It is also known as the It is also known as Shift in the Supply Curve. Movement along Supply Curve. It is due to the change in factors other It is due to a change in price, and other than price. The price of the commodity is factors are kept constant. kept constant. The rightward shift in the supply curve Upward movement along the supply curve shows an increase in supply. shows Expansion in supply. 20 14 12 15 10 8 10 6 5 4

Price 2 Price 0 0 1 2 3 4 5 6 1 2 3 4 5 6 Quantity Supply Quantity Supply

Reasons behind Rightward Shift – The reason behind Upward Movement is 1. Decrease in Price of related goods. Increase in Price. 2. Improvement in Technology 3. Decrease in price of factors of production 4. Objective is of Sales Maximization 5. Increase in the number of firms 6. Favorable Government policy 7. Bullish expectation from the market A leftward shift in the supply curve Downward movement along the supply shows a Decrease in supply. curve shows Contraction in supply. 20 14 12 15 10 10 8 6 5 4 2

Price 0

Price 0 1 2 3 4 5 6 1 2 3 4 5 6 Quantity Supply Quantity Supply

Reasons behind Leftward Shift – The reason behind the Downward 1. Increase in Price of related goods. Movement is Decrease in Price. 2. Obsolete Technology 3. Increase in price of factors of production 4. Objective is of Profit Maximization 5. Decrease in the number of firms 6. Unfavorable Government policy 7. Bearish expectation from the market

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1.13. ELASTICITY OF SUPPLY The elasticity of Supply measures responsiveness of quantity supply to the change in any factor affecting the supply of the commodity. Price elasticity of commodity refers to the responsiveness of quantity supply to change in the price of the commodity. The elasticity of Supply is a Quantitative Statement, whereas the Law of Supply is a Qualitative Statement. 1.13.1. METHODS OF CALCULATING PRICE ELASTICITY OF SUPPLY

PERCENTAGE METHOD -

ES = % Change in Quantity Supply % Change in Price

PROPORTIONATE METHOD -

ES = ∆QS * OP ∆ P OQS

1.13.2. DEGREE OF ELASTICITY OF SUPPLY The elasticity of Supply ranges between 0 to ∞

ELASTICITY DEGREE RELATIVE CHANGE Perfectly Inelastic 0 % ∆ QS = 0 Relatively Inelastic 0-1 % ∆ QS < % ∆ P Unitary Elastic 1 % ∆QS = % ∆ P Relatively Elastic 1-∞ % ∆QS > % ∆ P Perfectly Elastic ∞ % ∆P = 0

1.13.3. FACTORS AFFECTING ELASTICITY OF SUPPLY

1. Nature of Commodity – A commodity can be categorized as durable and non- durable. Durable goods are relatively elastic and non-durable goods are relatively inelastic. Similarly, industrial goods are relatively elastic and agriculture products are relatively inelastic. 2. Availability of Factors of Production- If factors of production are easily available then the supply of such goods will be relatively elastic. If factors of production are not easily available, then the supply of such goods will be relatively inelastic. 3. Cost of Production- If with an increase in output, the cost of production per unit also increases, then supply will be relatively inelastic. This is because the incentive of profit is choked by an increase in cost. But, if with an increase in output, the cost of

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production per unit doesn’t increases then supply will be relatively elastic, as the producer will be able to earn higher profit. 4. Time Period- Alteration in production is possible when the producer has enough time to make the arrangements. A producer having more periods to change the supply of a commodity will have a relatively elastic supply and vice versa. 5. Technique of Production – If technology in use is complex and expensive it would be difficult to moderate the production therefore supply will be less elastic and vice- versa. 1.14. FORMS OF MARKET

FORMS OF MARKET STRUCTURE

PERFECT COMPETITION IMPERFECT COMPETITION

MONOPOLISTIC MONOPOLY OLIGOPOLY

BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION No. Of There are large no. of There are large no. of There is only a single Buyers and small buyers and buyers and sellers. firm operating. Sellers sellers. It implies that no Each firm has a The firm is equal to single buyer/seller limited share in the the entire industry can influence the market. and has full control market price of the over the market. commodity. No single buyer or It can influence the seller can manipulate supply of the They can buy/sell the market. commodity in the any quantity at the market. same price. They try to increase their profit by Therefore, the price restricting the supply is constant for a firm. of the commodity and fixing high prices.

BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Type of All firms sell a Product In a monopoly market, Product homogeneous differentiation is a there is a single seller, product. It means unique feature of this no close substitute is each unit sold is market. Firms sell a available. identical in shape, differential product size, color, weight, that is a close etc.

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The product of substitute for each The monopolist does different firms is a other. not face competition. perfect substitute for Firms have partial They are the price each other. A firm control over the price maker. cannot change the of the product. price, as a slight Buyers do not have increase in price will perfect knowledge of shift the buyer to the market. another firm. High advertisement and selling cost are incurred. BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Knowledge Both buyers and Buyers and sellers Buyers have imperfect of Market sellers have perfect have imperfect knowledge regarding knowledge and knowledge regarding market conditions. information about market conditions. This is because of market conditions The reason behind product differentiation (product and price). this is the large no. and price This is because of a of firms selling discrimination. homogenous different products at product. different prices. Consumers are Advertisement and Producers cannot exploited by charging selling costs are charge different a high price for low- incurred. prices from different quality products. buyers. There is no Advertisement and advertisement or selling costs are selling cost to the incurred. producer. BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Mobility of The factors of There is imperfect In a monopoly, there is Factors of production are mobility of factors of a single firm and this Production perfectly mobile. production. firm is equal to an industry. It means factors can This is because shift from one producers are Hence, the mobility of producer to another. producing differential factors of production This is because of an products and the is not possible. identical product and process, techniques, no price and technology used discrimination. may differ.

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BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Freedom of A firm has the A firm has the The entry of a new Entry and freedom to enter and freedom to enter and firm is restricted, and Exit exit from the market exit from the market. the existing firm in long run without But new firms do not cannot exit from the financial or legal have absolute market. barriers. freedom of entry in the industry.

In long run, a firm New firms cannot Legal or Technical can earn a normal produce products barriers are imposed profit only. that are legally on new firms. In a situation, when protected through They may have- existing firms start patent rights. 1. Patent right earning an extra They cannot produce 2. Exclusive control normal profit, new identical products. over raw material or technique of firms will join the production. industry. This will 3. Exclusive license increase the supply from the government of the commodity to produce a and there will be a commodity. fall in the market 4. Heavy Investment price. Thus, extra restricts new investors to enter the market. normal profit will be 5. Government forms wiped out. a monopoly-like Similarly, in a Railways, Post, etc. situation when The existing firm existing firms bear cannot exit being the abnormal profit single seller in the (loss), they start to market. Also, it being exit from the market. a large-scale setup This will decrease the would incur an supply of the abnormal loss on exit. commodity and there will be a rise in the market price. Thus, extra normal losses will be wiped out.

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ASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Price Firms have no A firm can control A monopoly firm has control over price in the price of their full control over the a perfect competition product up to a price. market. certain limit in a Price discrimination is monopolistic market. done by the firm. Price remains It can increase the constant in the price up to a certain It means charging market. extent as there are different prices from This is because there competitors in the different buyers. is a large no. of market who are CONDITION for Price sellers and all of selling close Discrimination is them are selling substitutes of the 1. Single seller in the homogeneous product. market, having full products. Quantity sold control over the price. increases when there 2. No close substitutes is a decrease in the available. price of the product. BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Transportati No transportation High transportation There are low on and and selling costs are and selling costs are transportation and Selling Cost incurred by the incurred by the selling costs in a producer. This is producer. This is monopoly market. because there is a because differential large number of products are sellers selling produced, and each homogenous product firm tries to at a uniform price. maximize its supply in the market. Any transportation or selling cost arising will be imposed on the buyer of the commodity.

BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Advertise As there is a As different firms are Advertisement is not ment homogenous selling different required in a product, there is no products, there is the Monopoly market importance of greater importance of because a single firm advertisement. advertisement, is operating. because it informs

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the buyer about different features of the product. Advertisement helps in developing the brand loyalty of consumers. This allows partial control over price. BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Profit in Normal Profit is Normal Profit is Extra Normal / Long Run earned. earned. Abnormal Profit is earned. AR=AC AR=AC AR>AC

BASIS PERFECT COMPETITION MONOPOLISTIC MONOPOLY COMPETITION Demand Demand in a perfect Demand in a Demand in a Curve competition market monopolistic monopoly market is is perfectly elastic. competition market relatively inelastic. is relatively elastic. The demand curve is The demand curve The demand curve a straight line slopes downward. slopes downward. parallel to x axis. AR > MR This shows an inverse

This shows that a Ed > 1 relationship between firm can sell any price and quantity quantity at the demanded. prevailing price. Full control over price AR = MR doesn’t mean

Ed = ∞ monopolist can sell any amount of the commodity. AR > MR

Ed < 1

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12 25 25 10 Ed = ∞ 20 Ed > 1 20 Ed < 1 8 15 15 6 10 10 4

2 5 5

PRICE PRICE PRICE 0 0 0 0 10 20 30 40 0 10 20 30 40 0 10 20 QUANTITY QUANTITY QUANTITY

1.15. EQUILIBRIUM SITUATION The market of a commodity is at equilibrium when it neither faces shortage nor excess of the commodity at a particular price. It is that situation when the market demand of the commodity equals the market supply of the commodity at a particular price. Buyers are willing and able to buy the same quantity as sellers are willing and able to sell at a particular price. EXCESS DEMAND It refers to a situation when the quantity demanded is more than the quantity supplied at a prevailing market price. Whenever the market price of a commodity is less than its equilibrium price, there will be excess demand and this leads to a shortage of goods in the market. This happens because at lower price buyers are willing and able to buy more quantity but sellers are willing and able to sell less. This situation arises when the government increases the price ceiling. EXCESS SUPPLY It refers to a situation when the quantity supplied is more than the quantity demanded at a prevailing market price. Whenever market price is above the equilibrium price, there will be excess supply and this leads to an excess of goods in the market. This happens because at higher price sellers are willing and able to sell more quantity but buyers are willing and able to buy less. This situation arises where the government exercises price floor.

Quantity Quantity S Price 6 Supply Demand 5 E 5 50 10 4 3 D 4 40 20 Price 2 Excess 3 30 30 Demand 1 2 20 40 0 10 Quantity20 30 Demand40 50& 1 10 50 Supply 20

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CHAPTER 2 - NATIONAL INCOME ACCOUNTING AND RELATED AGGREGATES

2.1. IMPORTANT TERMS

•It refers to the services generated by factors of production. it includes FACTOR SERVICES Land, Labour, Machines, Material and Money.

•It refers to the income earned against factor services provided. FACTOR INCOME Example - Rent against land, Interest against capital and Wages against labor.

•It refers to the income earned without rendering any services. These TRANSFER INCOME are unilateral transfers. Example - Scholarship, Gifts And Grants.

•The goods that have crossed the production boundary and are ready to be used by their final user are known as final goods. No further production or value addition is to be done on these goods. They can be of two types: a.Capital Goods-These are the final goods that are used by the FINAL GOODS producer for the purpose of further production of other goods. These goods are of durable nature. They do not lose their identity in the production process. Example - Machines, Tools. b.Consumer Goods- These are the final goods that are consumed by the ultimate consumer for deriving direct consumption satisfaction. Example - Food, Clothes.

• These goods are still within the production boundary. Further INTERMEDIATE GOODS processing or value addition is to be done on these goods. These include raw material, semi-finished goods and resale good.

• In economics, gross investment refers to creation or addition of capital stock in an economy inclusive of depreciation. These capital stock help GROSS INVESTMENT in further production of other goods. Example - Machines, Tools and Equipment.

• In economics, net investment refers to creation or addition of capital stock in an economy exclusive of depreciation. These capital stock help NET INVESTMENT in further production of other goods. Example - Machines, Tools and Equipment.

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• Depreciation is the loss or fall in value of fixed assets due to – a.Normal wear and tear-The productive capacity of fixed assets goes on declining because of its continuous use. This leads to decrease in value of assets. b.Expected Obsolescence- It is the change in technology or technique of DEPRECIATION production which leads to loss in value of fixed assets. Also change in demand of goods and services due to change in taste and preference, fashion, trends etc. leads to fall in the price of fixed assets. c.Loss in the value of fixed assets due to natural calamities is known as a Capital Loss. It is an unexpected loss in value of assets. •Gross Value – Depreciation = Net Value

•They are the economic units that take economic decisions. They include individuals as well as institutions. They can be consumers deciding what to ECONOMIC AGENT consume, producers deciding what to produce. They also include government or banks who also take various economic decisions like how much to tax or how much the rate of interest is to be charged.

•Factor cost refers to all factor payments made by the producing unit to the factors of production for rendering productive services in the production of FACTOR COST goods and services. It is the cost of production incurred by firms in the form of rent, wages, and interest. •Factor Cost = Market Price- Net Indirect Taxes

• It is the price at which a commodity is sold in the market. It is the price that a consumer pays for a commodity. It is an addition of net indirect taxes to MARKET PRICE factor cost. •Market Price = Factor Cost + Net Indirect Taxes

•Net Indirect Tax = Indirect tax - Subsidies a.Indirect tax -It is the tax levied on goods and services that is passed on to the consumers. These taxes increase the price of goods and services NET INDIRECT TAX produced. Example - GST, VAT. b.Subsidies - Subsidies are financial help provided by the government to firms on production of certain commodities and for selling them at fixed price. it helps to reduce the price of goods and services.

•Net Factor Income from Abroad = •Factor income earned by normal residents of a country from rest of world - Factor income earned by non-residents in the domestic territory of the country. NET FACTOR •It refers to the difference between the factor income received from the rest INCOME FROM of the world and the factor income paid to the rest of the world. It is a part ABROAD of National Income. It is used to differentiate Domestic product from National product. Positive factor income from abroad is desirous as it results in greater national income than domestic income. It indicates that factor income earned by residents from other economies is more than the factor income earned by non – residents within the national borders.

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2.2. STOCK AND FLOW CONCEPT

Stock Variable Flow Variable It is a variable that is calculated at a It is a variable that is calculated over a particular point of time. period of time. It shows the amount at a specific point of It is expressed as the total amount that time which might have accumulated in occurred per unit of time. the past. Examples - Examples - Balance Sheet, Capital, Bank deposits, Trading and P&L account, Water in a river, Water in a tank, Cash in hand, Number of Births, Profits and Losses, Population, Wealth. Investments and Depreciation, Income and Expenditure, Withdrawals and Deposits. 2.3. LEAKAGES AND INJECTIONS

Leakages Injections Leakage means the withdrawal of money Injection means the addition of money to from the circular flow of income. the circular flow of income. It implies Contraction in the circular flow It implies Expansion in the circular flow of of income. income. It has a negative impact on the process of It has a positive impact on the process of production or income generation. production or income generation. It reduces the flow of income and It adds to the production capacity of the production. economy. It increases the flow of income. It reduces the demand for goods and It generates demand for goods and services. services. Example - Saving, Taxation, Imports. Example - Investment, Exports. 2.4. TYPES OF GOODS

Intermediate goods Final goods

These goods are still within the These goods are outside the production production boundary. They are acquired boundary and are ready for use by the for further Processing or value addition final users. during a year. These goods are not included in the These goods are included in the estimation estimation of National Income. of National Income. It includes the following - These are of 2 types- 1. Raw material 1. Consumer goods- When acquired for 2. Semi-finished goods consumption is called Consumer 3. Resale goods goods. 2. Capital goods - When acquired for investment is called Capital goods.

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These goods help in the production of These goods directly satisfy the current other goods and raising production wants and needs of a consumer. capacity. These can be used over and over again to These are purchased by consumers for produce goods and services. They do not consumption. These are the result of the lose their existence during the process. production activity. It includes - It can be of the following types- 1. Machines 1. Durable goods- These can be consumed 2. Tools over a longer period. Example – Car. 3. Equipment 2. Semi Durable goods- These are those goods which can be used for a limited period. Example - Crockery, Shoes. 3. Non-Durable Goods-These are perishable and for one-time consumption. Example – Milk, Ghee. 4. Services-These are intangible, that are purchased by consumers for the direct satisfaction of their wants. Example - Services rendered by Doctor, Lawyer. 2.5. DOMESTIC AND NATIONAL INCOME DOMESTIC TERRITORY OF A COUNTRY ● It helps to estimate Domestic Income. ● It is the area covered by the political border of the country. ● It also includes the following- 1. Embassy of a country located abroad. 2. Oil rigs and Fishing vessels operated by residents in international waters. 3. Airways and Waterways operated by residents of a country in two or more than two countries. 4. Army bases of a country located abroad. RESIDENTS OF A COUNTRY ● It helps to estimate National Income. ● A resident is a person who normally resides in a country for a period of 1year or more and whose economic interest also lies in that country. ● He is different from a citizen. A citizen of a country enjoys the legal rights of that country but the resident may or may not. ● The following individuals are not treated as residents- 1. Students visiting the country for educational purposes. 2. Patients visiting the country for medical treatment. 3. Tourists visiting the country. 4. Foreign employees working in the Embassy or International Organization.

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DOMESTIC INCOME

• Domestic Income is the money value of all final goods and services produced within the domestic territory of a country in an accounting year. • It is the sum of factor incomes generated by all the producing units located within the domestic territory of a country in an accounting year. Domestic Income = National Income – NFIFA

NATIONAL INCOME

National Income can be defined in three different ways-

FLOW OF GOODS AND SERVICES PRODUCED National Output is the sum of the monetary value of all final goods and services produced by normal residents of a country in an accounting year. FLOW OF INCOME National Income is the sum total of factor incomes earned by normal residents of a country in the form of rent, wages, salary, interest, and profit in an accounting year. FLOW OF EXPENDITURE National Product is the sum total of goods and services flowing during the year from the country’s productive system into the hands of ultimate consumers.

National Income = Domestic Income + Net Factor Income from Abroad

NATIONAL INCOME DOMESTIC INCOME 2.6. NATIONAL INCOME AGGREGATES

1. Gross Domestic Product @ factor cost (GDPFC) ● It refers to the sum total of factor income generated or earned within the domestic territory of the country during a year. ● It has to be done within the domestic territory only. It doesn’t matter whether income is generated by residents or non – residents of the country. It is inclusive of depreciation.

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2. Gross Domestic Product @ market price (GDPMP) ● It refers to the sum total of the market value of all the goods and services produced within the domestic territory of a country during a year. ● It has to be done within the domestic territory only. It doesn’t matter whether the production is done by residents or non – residents of the country. It is inclusive of depreciation.

3. Gross National Product @ factor cost (GNPFC) ● It refers to the sum total of factor income generated or earned by all the residents of the country during a year. ● It has to be earned by residents only. It doesn’t matter whether the income is generated within the domestic territory or outside the domestic territory of the country. It is inclusive of depreciation.

4. Gross National Product @ market price (GNPMP) ● It refers to the sum total of the market value of all the goods and services produced by all the residents of a country during a year. ● It has to be done by residents only. It doesn’t matter whether the production is done within the domestic territory or outside the domestic territory of the country. It is inclusive of depreciation.

5. Net Domestic Product @market price (NDPMP) ● It refers to the sum total of the market value of all the goods and services produced within the domestic territory of a country during a year. ● It has to be done within the domestic territory only. It doesn’t matter whether the production is done by residents or non – residents of the country. It is exclusive of depreciation.

6. Net National Product @ market price (NNPMP) ● It refers to the sum total of the market value of all the goods and services produced by all the residents of a country during a year. ● It has to be done by residents only. It doesn’t matter whether the production is done within the domestic territory or outside the domestic territory of the country. It is exclusive of depreciation.

7. Net Domestic Product @ factor cost (NDPFC) – ● It refers to the sum total of factor income generated or earned within the domestic territory of the country during a year. ● It has to be done within the domestic territory only. It doesn’t matter whether income is generated by residents or non – residents of the country. It is exclusive of depreciation. ● It is also known as Domestic Income.

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8. Net National Product @ factor cost (NNPFC) – ● It refers to the sum total of factor income generated or earned by all the residents of the country during a year. ● It has to be earned by residents only. It doesn’t matter whether the income is generated within the domestic territory or outside the domestic territory of the country. It is exclusive of depreciation. ● It is also known as National Income.

2.7. METHODS OF CALCULATING NATIONAL INCOME AGGREGATES

Methods of Calculating National Income

Production / Output / Value Income Method Expenditure Method Addition Method

2.7.1. PRODUCTION METHOD Under this method, value addition done by all the producing units is considered. Value addition is calculated by deducting intermediate consumption from the value of output.

A Sum total of all the value additions lead us to GDPMP.

Gross Value Added by = Value of output - Intermediate consumption each sector Value of Output = Sales + Change in Stock Change in Stock = Closing stock - Opening stock Gross Value Added by = Sales + Change in - Intermediate consumption each sector Stock

GDPMP = Sum of GVA by all sectors 2.7.2. INCOME METHOD Under this method, all the factor incomes generated within the domestic territory of the country is considered. Transfer payments received are not included.

NDP FC = A) COMPENSATION OF EMPLOYEE + Wages and Salary in cash & kind + Employers Contribution to Social Security + Pension on Retirement B) OPERATING SURPLUS + Rent & Royalty + Interest + Profit (Corporate tax + Corporate savings + Dividend) + C) MIXED INCOME OF SELF EMPLOYED

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2.7.3. EXPENDITURE METHOD

Under this method, all the expenses incurred on all the goods and services produced within the domestic territory is considered. It includes expenditure done on goods and services produced within the domestic territory of a country.

GDPMP = Private Final Consumption Expenditure

+ Government Final Consumption Expenditure

+ Gross Domestic Capital Formation (Gross Domestic Fixed Capital Formation + Change in Stock)

+ Net Exports ( Exports – Imports )

NDP MP = Private Final Consumption Expenditure

+ Government Final Consumption Expenditure

+ Net Domestic Capital Formation (Net Domestic Fixed Capital formation + Change in Stock)

+ Net Exports ( Exports – Imports ) Change in Stock = Closing Stock – Opening Stock 2.7.4. NATIONAL DISPOSABLE INCOME

= GNP + Net Current Transfers from Rest of the Gross National Disposable MP World Income

Net National Disposable = NNPMP + Net Current Transfers from Rest of the

Income World

2.7.5. PRECAUTIONS WHILE CALCULATING NATIONAL INCOME VALUE ADDED METHOD - 1. Avoid double counting of production, only the value of the final good is included. 2. The value of intermediate consumption is not included, as their value is already included in the value of the final good. 3. The sale & purchase of second-hand goods is not included, as they are already accounted for the year in which they were produced. 4. The Imputed value of output produced for self-consumption is included, as they are an addition to the final output. 5. The value of services rendered in sales must be included. Ex – Commission. INCOME METHOD - 1. Transfer income like old-age pension and scholarships, should not be included, because there is no value addition in the economy. 2. Income from illegal activities is not included, as the income generated does not have any record and is termed as black money. 3. Income from windfall gain is not included, as there is no value addition in the economy. 4. Interest on loans taken for productive activity is to be included. Interest on loan taken for non-productive activity is not included.

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5. All taxes to the government are compulsory payment, so are not included in the calculation of national income. 6. Income from the owner-occupied house is to be included. 7. The Imputed value of output produced for self-consumption is included, as they are an addition to the final output. 8. Commission earned from sale & purchase of second-hand goods, Brokerage from sale & purchase of assets/ shares are included as they are factor service. 9. Wages & salaries in cash and kind both are included. EXPENDITURE METHOD - 1. Avoid double counting of expenditure, expenditure on intermediate product / second- hand goods are not included. 2. Transfer expenditure is not to be included. Ex – Scholarship. 3. Expenditure on shares and bonds are not included. They do not add to the productive capacity of an economy. 4. Exports are added and imports are deducted. Things Included in National Income Things Not Included in National Income Commission earned. Sale and purchase of second-hand goods. Value of owner’s occupied house. Sale and purchase of shares, bonds, and debentures. The output is produced for self- Income through illegal activities, Black consumption (own account production). money. Drawings from the firm. Services rendered by the government for Transfer payments (scholarships, gifts & free. grants, old-age pensions, unemployment allowance, financial help to victims of natural calamity\war, pocket money). Pensions on retirement. They are a part of Intermediate consumption (electricity\raw the compensation to employees. material consumed by a factory). Wages received by Indians working in Indirect taxes. embassies of other countries. Profits earned by Indian companies are Services rendered by a housewife. located in other countries. Rent received by Indian residents on Capital gain & loss, Lottery income, building rented out to foreign embassies Windfall Gain. in India. Employer’s contribution to Social Security Schemes like Provident fund. Defense and security services.

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2.8. GDP DEFLATOR It shows the change in the level of prices of all the goods and services over a period of time from the base year to the current year. It is calculated as the ratio of nominal GDP to real GDP multiplied by 100. It shows the effect of change in price on GDP. It is the change in GDP due to a change in the price level over a period of time. GDP Deflator = Nominal GDP * 100 Real GDP Nominal GDP Real GDP Nominal GDP refers to the sum total of Real GDP refers to the sum total of the the market value of all the goods and market value of all the goods and services services produced within the domestic produced within the domestic territory of territory of a country during a period at a country during a period calculated at current year prices. base-year prices.

Nominal GDP = P1 * Q1 Real GDP = P0 * Q1 Price of Current year*Quantity of Current Price of Base year*Quantity of Current year year It is also known as GDP at current prices. It is also known as GDP at constant prices. It does not reflect the real growth in the It reflects the real growth in the level of level of output and income in the output and income in the economy economy, because it reflects inflation and because it adjusts the effect of inflation growth both. by taking a constant price. There might not be any change in the Real Income will change only if the real level of output over a period of time, still, output level changes over a period of time Nominal income may increase because of because it is measured at a constant an increase in the prices over the period. price. If the output level does not change Real Income will change. 2.8.1. GREEN GDP

It means the calculation of GDP excluding cost in terms of environmental pollution and exploitation of natural resources. 2.9. PER CAPITA INCOME Per capita income is a measure of the amount of money earned per person in a nation or geographic region. Per capita income can be used to determine the average per-person income for an area and to evaluate the standard of living and quality of life of the population. Per capita income for a nation is calculated by dividing the country's national income by its population.

PER CAPITA INCOME = NI / POPULATION

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2.10. PRIVATE INCOME “Private income is the total of factor incomes and transfer incomes received from all sources by the private sector (private enterprise and households) within and outside the country.” It also includes the net factor income from abroad. Private Sector consists of private enterprises and households [factor owners). Thus, private income consists of not only factor incomes earned within the domestic territory and abroad but also all current transfers from the government and the rest of the world. It is the sum of earned incomes and transfer incomes received by the private sector. PRIVATE INCOME = NATIONAL INCOME + TRANSFER PAYMENTS + INTEREST ON PUBLIC DEBTS - PROFITS AND SURPLUS OF PUBLIC UNDERTAKINGS 2.11. PERSONAL INCOME Personal income refers to all income collectively received by all individuals or households in a country. Personal income includes compensation from several sources, including salaries, wages, and bonuses received from employment or self-employment, dividends, and distributions received from investments, rental receipts from real estate investments, and profit-sharing from businesses. PERSONAL INCOME = NATIONAL INCOME + TRANSFER PAYMENTS + INTEREST ON PUBLIC DEBTS - PROFITS AND SURPLUS OF PUBLIC UNDERTAKINGS - CORPORATE TAX - CORPORATE SAVINGS

2.12. DISPOSABLE INCOME Disposable income, also known as disposable personal income (DPI), is the amount of money that households have for spending and saving after income tax has been accounted for. Disposable personal income is often monitored as one of the many keys economic indicators used to gauge the overall state of the economy. DISPOSABLE INCOME = NATIONAL INCOME + TRANSFER PAYMENTS + INTEREST ON PUBLIC DEBTS - PROFITS AND SURPLUS OF PUBLIC UNDERTAKINGS - CORPORATE TAX - CORPORATE SAVINGS - PERSONAL INCOME TAX

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CHAPTER 3 - INDIAN UNION BUDGET

● It is a statement of the estimates of the government receipts & expenditure during the financial year. ● It is prepared annually. It follows a definite plan. ● The government of India prepares a budget every year and presents in parliament on the last working day of February. ● The rationale behind preparing the budget is to present the performance of the government for the past year and also to show the plans and policies made by the government for the coming year. 3.1. OBJECTIVES OF PREPARATION OF BUDGET

Growth •GDP Growth is the principal objective of budgetary policy. By making investment on Infrastructure and inducing private investment by means of tax and subsidies.

Redistribution of Income and Wealth in the Economy •One of the main objectives of the budget is to redistribute the income and wealth in the economy. It is done by generating more revenue from rich classes and spending those revenues on backward classes in order to bring equality of income. It is a way to social justice. Fiscal instruments of taxation and subsidies are used for it.

Reallocation of Resources •With the help of budget government. reallocates the resources in an economy. It focuses on those areas of an economy which are backward in terms of growth and require investment of resource to be at par with other areas. It balances the goal of profit maximization and social welfare.

Achieving Economic Stability •Another objective of the budget is to prevent the economy from the fluctuation of inflation and deflation. It is done by planning revenue and expenditure in a budget according to status of the economy. Inflation is controlled by reducing government expenditure and increasing revenue, while deflation is controlled by increasing government expenditure and decreasing revenue.

Employment Opportunities •Government focus on generating employment opportunities through budget allocation. Investment in public sector enterprises and poverty alleviation programs like MGNREGA help in meeting employment required in country.

Balanced Regional Growth •The budgetary policy focuses on the development of backward regions in the country. Establishment of Special economic zones (SEZ) in the backward areas helped in growth of those areas.

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3.2. OVERVIEW OF INDIAN BUDGET

The first Indian Budget was presented by Mr James Wilson on February 18,1869 after Indian Budget was introduced on April 7, 1860 by the East India Comapny. The first budget of independent India was presented by the then finance minister RK Shanmukham Chetty on November 26,1947. Till 1955 budget was only printed in English language. However from 1955- 56, budget started getting printed in both languages Hindi and English. In the British era, the budget used to be presented at 5 PM. This practice was discontinue in the year 2001 by presenting the budget at 11AM. Until 2017 , the ritual was to present the budget on the last working days of the February. From last 2 years budget is now presented on the first working day of the February. Mr. KC Neogy and Mr. HN Bahuguna were the only 2 Finance Ministers who did not present any Indian Budget. The record of presenting maximum number of budgets is held by Sri Morarji Desai for presenting 10 budgets . For the first time in 92 years, Union budget of 2017 merged the union budget with the rail budget which was usually presented separately.

3.3. KEY TERMINOLOGIES

• Article 112 of the constitution requires the government to present to Parliament a statement of estimated receipts and expenditure in respect of every financial year April 1 to March 31. This statement is ANNUAL called annual financial statement. FINANCIAL STATEMENT • It is usually a 10 page document divided into 3 parts - consolidated fund, contingency fund and public account. For each of these funds the government has to present a statement of receipts and expenditure.

• All the revenues raised by the government, money borrowed and receipts from loans given by the government flow into the CONSOLIDATED consolidated fund of India. All government expenditure is made from FUND this fund except for exceptional items met from the contingency fund or the public account. No money can be withdrawn from this fund without the parliaments approval.

• Demand for grants is the form in which estimates of expenditure from the consolidated fund, included in the annual financial statement and required to be voted upon in the Lok Sabha, are submitted in pursuance of Article 113 of the constitution. DEMAND FOR GRANTS • It includes provisions with respect to revenue expenditure, capital expenditure, Grants to State and Union territory governments together with loans and advances. Generally one demand for grant is presented in respect of each ministry or department. However for large ministries and departments more than one is presented.

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• It gives power to the government to withdraw funds from the consolidated fund of India for meeting the expenditure during the financial year. Post the discussions on budget proposals and the APPROPRIATION voting on demand for grants the government introduces the BILL appropriation bill in the Lok Sabha. It is intended to give authority to the government to withdraw from the consolidated fund the amounts so voted for meeting the expenditure during the financial year. • A finance bill is a money bill as defined in article 110 of the constitution. The proposals of the government for levy of new taxes modification of the existing tax structure of continents of the existing text structure be on the period approved by Parliament are submitted to Parliament through this bill. FINANCE BILL • The finance bill is accompanied by a memorandum containing explanations of the provisions included in it. The finance bill can be introduced only in Lok Sabha. However the Rajya Sabha can recommend amendments in the bill. The bill has to be passed by the Parliament within 75 days of its introduction. • As the name suggests any urgent unforeseen expenditure is made from this fund. The rupees 500 Crore fund is at the disposal of the CONTIGENCY president. Any expenditure incurred from this fund requires a FUND subsequent approval from Parliament and the amount withdrawn is returned to the fund from the consolidated fund. • This fund is to account for flows for those transactions where the government is merely acting as a banker. For instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid back at some time to their rightful owners. Because of this nature of the fund, expenditure from it is not required to be approved by the parliament. • For each of these funds the government has to present a statement PUBLIC ACCOUNT of receipts and expenditure. It is important to note that all money flowing into this is called receipts received and not revenue. Revenue in budget context has a specific meaning. • The constitution requires that the budget has to distinguish between receipts and expenditure on Revenue account from other expenditure. So all receipts in, say consolidated fund, are split into revenue budget and capital budget which includes non revenue receipts and expenditure. • All receipts and expenditure that in general do not entail sale or creation of assets are included under the revenue account. On the REVENUE receipt side, taxes would be the most important revenue receipt. On RECEIPTS/ the expenditure side, anything that does not result in creation of EXPENDITURE assets is treated as revenue expenditure. Salary, subsidies and interest payments are good examples of revenue expenditure. • All receipts and expenditure that liquidate or create an asset would in general be under capital account. For instance, if the government CAPITAL sells shares in public sector companies, like it did in the case of RECEIPTS/ Maruti, it is an effective selling of assets. The receipts from the sale EXPENDITURE would go under the capital account. On the other hand, if the government give someone a loan from which it expects to receive interest, that expenditure would go under capital account.

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3.4. COMPONENT OF BUDGET

Components of Government Budget

Revenue Budget Capital Budget

Capital Revenue Receipts Revenue Expenditure Capital Receipts Expenditure

3.4.1. REVENUE BUDGET It records all the revenue receipts and expenditures. If the revenue expenses are more than receipts, it indicates a revenue deficit. Revenue deficit does not mean an actual loss of revenue for the government but it only means a shortfall in revenue from what was expected by the government. The revenue budget is for the normal running of government departments and various services, interest payments on debt, subsidies, etc. These are regular and reoccurring in nature.

Revenue Receipt Revenue Expenditure

Revenue receipt is that receipt which Revenue expenditure is that expenditure does not result in any change in asset and which does not result in any change in the liability status of the government. asset and liability status of the government.

These receipts neither decrease the This expenditure neither decreases the liabilities nor create assets of the liabilities nor creates assets of the government. government.

Revenue receipts include - It is also known as income statement 1.Tax receipts expenditure. it denotes short term cost 2.Non-tax receipts related assets that are not capitalised.

Revenue expenditure includes interest on borrowing, subsidies provided and social security schemes launched by government etc.

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TYPES OF REVENUE RECEIPTS

Non-tax Revenue It includes receipts from the government's Tax Revenue disinvestment process which are nothing but the It includes receipts from direct tax which is in proceeds from the stake sale in various public the form of income tax, corporate tax etc. paid sector undertakings. to the government. It also includes the dividend income which the It also includes various indirect taxes like GST, government receives as a shareholder of the excise, custom and cess levied and collected by various public sector undertakings. the government on various goods and services. The other sources include interest on loan, fines and fees and receipts for services that it renders.

3.4.2. CAPITAL BUDGET The capital budget is considered to be productive as it shows the investment type activities of the government. It consists of capital receipts and payments.

Capital Receipts Capital Expenditure

Capital receipt is that receipt which Capital expenditure is that expenditure results in change in asset and liability which results in change in the asset and status of the government. liability status of the government.

These receipts either - These expenditure either - • Create liabilities for the government • Reduces liabilities for the government or or • Reduce assets of the government. • Create assets of the government.

Types of Capital Receipts - Example – 1.Recovery of Loans 1.Investments -Expenditure on land & 2. Disinvestment receipts building, machinery and equipment 3. Sale of securities 2.Purchase of shares 4. Borrowings 3.Repayment of Loan 4.Lending

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TYPES OF CAPITAL RECEIPTS

Recovery of Loans - Sale of Borrowings - Disinvestment - Government Central Government The Government Disinvestment is Securities - grants loan to state borrows money done by sale of government, foreign from different shares of public Government can governments etc, to sources like Public, sector enterprises to sell its securities in cope with financial RBI, foreign the private sector. the market to raise crisis. Lendings form a Governments and This is a source of funds. Securities are part of assets, as they bodies to meet its capital receipt as it assets and their earn regualr income in expenditure. reduces the assets sale leads to the form of interest. Borrowings create of the government. decrease in assets When these loans are liability for the of the government. recovered by the government. government, they result in reduction of assets.

3.4.3. VARIABLES COVERED UNDER FISCAL DEFICIT

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3.5. EXPENDITURE BUDGET It refers to the estimated expenditure of the government. it shows the revenue and capital payments to various ministries and departments and is presented under Plan and Non-Plan Expenditure. ● It is also called public expenditure. ● It is a process of allocating or spending revenues collected by the government in different areas of the economy. ● It can be classified as –

Planned Expenditure Non-Planned Expenditure Planned expenditure refers to that Non-Planned expenditure refers to the expenditure that relates to specified plans expenditure which is not related to and programs of development and specified plans and programs of assistance of the central government to development and assistance of the central the state government. government to the state government. Plan expenditure pertains to the money to Non-plan expenditure is what the be set aside for productive purposes, like government spends on the so-called non- various projects of ministries. productive areas, such as salaries, subsidies, loans, and interest. 3.6. TYPES OF BUDGET DEFICIT

Revenue Expenditure - Revenue Deficit Revenue Receipts

Total Expenditure - BUDGET DEFICIT Fiscal Deficit Total Receipts [excluding borrowings]

Fisscal Deficit - Primary Deficit Interest Payment

3.6.1. REVENUE DEFICIT

• It is the excess of revenue expenditure over revenue receipt.

IMPLICATIONS OF REVENUE DEFICIT ● It implies dissaving on government account because the government is using up savings to cover the gap between revenue expenditure and receipts. ● It implies that the Government has to make up this deficit by disturbing its capital budget, either through borrowings or sale of assets. ● The use of capital receipts may lead to an inflationary situation in the economy.

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3.6.2. FISCAL DEFICIT

• It is also known as the Budget deficit. It is the excess of Total Expenditure over Total Receipts (excluding borrowings). • It is equal to Borrowings of the government. • It is not necessarily inflationary. It should be controlled and managed, about 3 % of GDP is considered to be manageable. • It is calculated in absolute terms and also as a percentage of GDP of the country. • For Example, if the gap between receipts and expenditure is of 5 lakh and the country’s GDP is Rs 200 lakh crore, the fiscal deficit is 2.5 % of the GDP. IMPLICATIONS OF FISCAL DEFICIT ● Debt Trap – Borrowings by the government is one of the reasons for fiscal deficit. It creates the problem of repayment of loans and regular interest payments. This creates revenue expenditure which leads to revenue deficit. ● Foreign Dependence – Government borrows money from the rest of the world. This causes economic slavery if the lending country dictates its terms on the borrowing country. ● Inflationary Spiral – Government borrows from RBI to meet its fiscal deficit. This increases the money supply that leads to an increase in the general price level. A persistent increase in the general price level leads to an inflationary spiral. ● Erosion of Government Credibility- High fiscal deficit erodes the credibility of the government in the domestic as well as international money market. The credit rating of the government is lowered. MEASURES TO REDUCE FISCAL DEFICIT ● Reduction in Public Expenditure – Government should reduce its expenditure, by reducing wasteful expenditure and curtailing non-plan expenditure. ● Increase in Receipts – Government should increase its receipt by borrowings and disinvestment.

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CHAPTER 4 – INDIAN FINANCIAL MARKETS

4.1. OVERVIEW OF INDIAN FINANCIAL ECOSYSTEM

• The financial system of an economy is a crucial element for its economic development. • It helps in creation of wealth for the nation. FEATURES OF • It plays an important role in economic development of a country. FINANCIAL SYSTEM • It encourages both savings and investment. • It links savers and investors. • It assists in capital formation. • It facilitates expansion of financial markets..

• Allocation and mobilization of savings. Mainly, the financial • Provision of funds. system of a country is • Facilitating the financial transactions. concerned with the • Developing financial markets. following- • Provision of legal financial structure. • Provision of financial and advisory services.

• Indian has a diversified financial sector undergoing rapid expansion. • It is seeing strong growth of existing financial services firms and also entrance of new entities entering the market. • The sector comprises of - The important • Commercial banks features of Indian • Insurance companies Financial System are - • Non-banking financial companies • Co-operatives • Pension funds • Mutual funds and • Other smaller financial entities.

Financial service Gross Domestic Initial Public sector Savings Offering UHNWI

• It includes capital • India's Gross • Initial Public • Ultra High Net markets, insurance Domestic Savings Offers have seen Worth Individuals companies, non (GDS) was tremendous have seen a banking finance 30.50% of its growth growth of 118% companies GDP from 2013 to 2018

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4.2. NOTEWORTHY DEVELOPMENTS IN INDIAN FINANCIAL ECOSYSTEM

Rising incomes are driving the demand for financial services across income brackets. Financial inclusion drive from RBI has expanded the target market to semi – urban and rural areas. Investment corpus in Indian insurance sector can rise to US$ 1 trillion by 2025. Credit, insurance and investment penetration is rising in rural areas. HNWI (High Net Worth Individual) participation is growing in the wealth management segment. Lower mutual fund penetration of 5 – 6 percent reflects latent growth opportunities. The Government of India launched Indian Post Payments Bank (IPPB), to provide every district with one branch which will help increase rural penetration. India benefits from a large cross-utilization of channels to expand reach of financial services. Maharashtra has launched its mobile wallet facility allowing transferring of funds from other mobile wallets. Maharashtra is the first state to launch it. As of October 2018, the Financial Inclusion Lab has selected 11 fintech innovators with an investment of US$ 9.5 million promoted by the IIM-Ahmedabad’s Bharat Inclusion Initiative (BII) along with JP Morgan, Michael and Susan Dell Foundation, and the Bill and Melinda Gates Foundation. Government has approved new banking licenses and increased the FDI limit in the insurance sector.

4.3. KEY FACETS AND GROWTH OF FINANCIAL INSTITUTIONS IN INDIA The significant characteristics of the Indian financial system are as under:

It plays a pivotal role in accelerating the rate and volume of savings through provision of different financial instruments and efficient mobilization of savings. It is playing a significant role in increasing the national output by providing funds to corporate customers to expand their business operations. Safeguarding the interests of the investors by ensuring smooth financial transaction through regulatory bodies like, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) etc. Contributes substantially towards the economic development and raising the standard of living of the people. Promotes development of weaker section of the society through rural development banks and cooperative societies. Assist corporate customers to make better financial decisions by offering effective financial and advisory services. Facilitates financial deepening and broadening. Financial deepening refers to increase in financial assets as a percentage of GDP and financial broadening pertains to increasing number of participants in the financial system.

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4.4. BANKING SECTOR The banking industry handles finances in a country including cash and credit. Banks are the institutional bodies that accept deposits and grant credit to the entities and play a major role in maintaining the economic stature of a country. Given their importance in the economy, banks are kept under strict regulation in most of the countries. In India, the Reserve Bank of India (RBI) is the apex banking institution that regulars the monetary policy in the country. BANKS ARE CLASSIFIED INTO FOUR CATEGORIES

Types of bank

Commercial Small Finance Co-operative Banks Banks Payments Banks Banks

Public sector banks

Private sector banks

Foreign banks

Regional Rural Banks (RRBs)

• They are regulated under the Banking Regulation Act, 1949. Commercial Banks • Their business model is designed to make profit. • Their primary function is to accept deposits and grant loans to the general public, corporate and government.

• These are the nationalized banks and account for more than Public sector banks 75 per cent of the total banking business in the country. • Majority of stakes is these banks are held by the government.

• These are those in which major stake or equity is held by private shareholders. Private sector banks • All the banking rules and regulations laid down by the RBI will be applicable on private sector banks as well.

• These banks have their headquarters in a foreign country but operate in India as a private entity. Foreign Banks • These banks are under the obligation to follow the regulations of its home country as well as the country in which they are operating.

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• These are also scheduled commercial banks. • They are established with the main objective of providing credit to weaker sections of the society like agricultural labourers, marginal farmers and small enterprises. • They usually operate at regional levels in different states of Regional Rural Banks India. • They may have branches in selected urban areas as well. (RRBs) • They provide banking and financial services to rural and semi-urban areas. • They facilitate government operations like disbursement of wages of MGNREGA workers, distribution of pensions, etc. • They also provide Para-Banking facilities like debit cards, credit cards and locker facilities.

Payments Bank Small Finance Banks 1. This is a relatively new model of bank in the 1. This is a niche banking segment in the country. Indian Banking industry. 2. It is aimed to provide financial inclusion to 2. It was conceptualized by the RBI. sections of the society that are not served by other banks. 3. It is allowed to accept a restricted deposit. 3. The main customers of small finance banks 4. They also offer services like - include- a. ATM cards a. micro industries b. Debit cards b. small and marginal farmers c. Net-banking c. unorganized sector entities d. Mobile- banking d. small business units. 5. The following are the payments bank in 4. These are licensed under Banking Regulation India- Act, 1949. a. India Post Payments Bank 5. They are governed by RBI Act, 1934 and b. Fino Payments Bank FEMA. c. Paytm Payments Bank d. Airtel Payments Bank

Co-operative banks

Urban Rural State Primarily, cooperative banks are These are located in rural These are federation of the located in urban and semi-urban ares to cater needs of small central cooperative bank areas. These banks essentially lent to and marginal farmers and which acts as custodian of small borrowers and business centered agricutural labourers. the cooperative banking around communities, localities, work structure in the State. place and groups.

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4.4.1. PUBLIC AND PRIVATE SECTOR BANKS PUBLIC SECTOR BANKS IN INDIA – PAST, PRESENT & FUTURE

PAST 1. Banking sector was developed during the British era. 2. British East India Company set up three banks: a. Bank of Bengal (1809) b. Bank of Bombay (1840) c. Bank of Madras (1843) These three banks were later merged into Imperial Bank. 3. Imperial Bank was taken over by State Bank of India in 1955.

4. The Reserve Bank of India was estabilished in 1935.

5. On July 19, 1969, 14 major scheduled commercial banks having a deposit of more than INR 50 crore were nationalized. a. Central Bank of India b. Bank of Maharashtra c. Dena Bank d. Punjab National Bank e. Syndicate Bank f. Canara Bank g. Indian Overseas Bank h. Bank of Baroda i. Union Bank j. Allahabad Bank k. United Bank of India l. UCO Bank m. Bank of India 6. In April 1980, 6 more commercial banks with deposits of more than 700 crore were nationalized. a. Andhra Bank b. Corporation Bank c. New Bank of India d. Oriental Bank of Commerce e. Punjab & Sind Bank f. Vijaya Bank

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PRESENT 1. PSBs are formidable players in Indian banking sector.

2. Their market share in overall bank credit and overall bank deposits was at 63.2 per cent and 66.9 percent respectively at the end of FY18. 3. There has been decline in PSBs market share.

FUTURE 1. 10 public sector banks will be merged into four entities. 2. This would take the number of banks in the country from 27 in 2017 to 12. 3. These bank mergers will create big banks and benefit them from increased CASAs. 4. The largest merger was announced between Punjab National Bank, Oriental Bank of Commerce and United Bank. 5. The merged entity will become second largest public sector bank with 11,437 branches. 6. Second merger will be between Canara bank and Syndicate bank which will create fourth largest public sector bank. 7. Union bank will merge with Andhra bank and Corporation bank. 8. Indian bank will merge with Allahabad bank.

PRIVATE SECTOR BANKS Private Sector Banks refer to those banks where most of the capital is in private hands. In India, there are two types of private sector banks viz. Old Private Sector Banks and New Private Sector Banks. Old private sector banks are those which existed in India at the time of nationalization of major banks but were not nationalized due to their small size of some other reason. After the banking reforms, these banks got the license to continue and have existed in India along with new private banks and government banks.

At present, there are 12 old private sector banks in India as follows- 1.Catholic Syrian Bank 2. City Union Bank 3. Dhanalaxmi Bank 4. Federal Bank 5. Jammu and Kashmir Bank 6. Kamataka Bank 7. Karur Vysya Bank 8. Lakshmi Vilas Bank 9. Nainital Bank 10. Ratnakar Bank 11. South Indian Bank 12. Tamilnad Mercantile Bank Among the above, Nainital Bank is a subsidiary of the Bank of Baroda, which has 98.57% stake in it.

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The new private sector banks were incorporated as per the revised guidelines issued by the RBI regarding the entry of private sector banks in 1993. At present, there are nine new private sector banks- 1.Axis Bank 2. Development Credit Bank (DCB Bank Ltd) 3. HDFC Bank 4. ICICI Bank 5. Induslnd bank 6. Kotak Mahindra Bank 7. Yes Bank 8. IDFC 9. Bandhan Bank Small private banks are financial institutions that have the license to offer fundamental banking services by accepting deposits and lending. The aim of these banks is to provide financial inclusion to those sections of the economy which is not served by other banks like small business units, small and marginal farmers, micro and small industries and the unorganized sector. The list of small private banks in India are as under - 1. Ujjivan small finance bank 2. Jana small finance bank 3. Equitas small finance bank 4. AU small finance bank 5. Capital small finance bank 6. Fincare small finance bank 7. ESAF small finance bank 8. North East small finance bank 9. Suryoday small finance bank 10. Utkarsh small finance bank.

SOME SIGNIFICANT EVENTS IN INDIAN FINANCIAL SYSTEM: Balance of Payment crisis in 1991. Government to begin dismantling the license permit raj. Manmohan Singh (then Finance Minister) began setting up a framework for fiscal reforms. Reforms took place under the Prime Minister Narasimha Rao. Rangarajan as Governor began erecting a new monetary structure. The economy was rocked by fraud in non-banking finance company ex. CRB Financial. Institutions such as IDBI, ICICI, HDFC, and UTI were given licenses. Others who managed to get licenses were Centurion Bank, Bank of Punjab, Times Bank, Global Trust Bank, and IndusInd Bank of the Hinduja. Except for IndusInd bank, all other got merged with other banks. Global Trust Bank was also involved in a scandal. It was later merged with Oriental Bank of Commerce in 2004. Centurion Bank of Punjab and Times Bank merged with HDFC Bank.

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4.4.2. INDUSTRIAL FINANCE CORPORATION OF INDIA AND SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA. A) INDUSTRIAL FINANCE CORPORATION OF INDIA At the time of Independence in 1947, the Indian Capital Markets were less developed. The demand for capital was growing rapidly but there was a dearth of providers of capital. Less equipped commercial banks were unable to supply capital. To bridge the demand-supply gap for the capital needs of the economy, the Government of India established the Industrial Finance Corporation of India (IFCI) on July 1, 1948, by way of an IFC Act 1948. IFCI was the first Development Financial Institution of India set up to propel economic growth through the development of infrastructure and industry. The Liberalization of the Indian Economy in 1991 made significant changes in the Indian Capital Markets & Financial System. The constitution of IFCI was changed from a statutory corporation to a company under the Indian Companies Act, 1956. As a result, the name of the company was changed to ‘IFCI Limited’ with effect from October 1999. Currently, IFCI Group has the following subsidiaries – ✓ Stock Holding Corporation of India Ltd ✓ IFCI Venture Capital Fund Ltd ✓ IFCI Factors Ltd ✓ IFCI Infrastructure Development Ltd ✓ IFCI Financial Services Ltd ✓ MPCON ✓ Management Development Institute and ✓ Institute of Leadership Development IFCI PRODUCTS The product of IFCI may be categorized under the following:

IFCI Ltd, established as the Industrial Finance Corporation of India (IFCI) on July 1, 1948, was the first Development Financial Institution in the country, setup to cater to the long-term finance needs of the industrial sector. Since its inception, IFCI has been a catalyst in creating a robust industrial base for the country through modernization of Indian industry, export promotion, import substitution, nurturing sunrise industries Loan Products: etc. through commercially viable and market – friendly initiatives. In order to continue serving the needs of the Industry and society, IFCI offers the following products broadly categorized into three segments – Project Finance, corporate Finance & Structured Finance spreading across industries, services and Agro Based sectors.

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IFCI’s team of professionals with in-depth understanding of the sectoral dynamics, has the ability to provide customized financial solutions to meet the growing & diversified requirement for different levels of the projects – Greenfield projects, brownfield, diversification and modernization of existing projects in infrastructure Project Finance: and manufacturing sectors. The various sectors covered under Project Finance are Power including Renewable energy, Telecommunications, Roads, Oil & gas, Ports, Airports, Basis Metals, Chemicals, Pharmaceuticals, Electronics, Textiles, Real Estate, Smart Cities & Infrastructure, etc.

IFCI caters to the varied needs of diverse set of customers ranging across small, mid and large corporate. IFCI offers financial solutions in areas of corporate finance through Balance Sheet Funding, Loan Against Shares, Lease Rental Discounting, Corporate Promoter Funding, Long term Working Capital requirements, Capital Expenditure Finance: and regular maintenance Capex. IFCI also offers a Short Term Loan product (tenure upto 1 year) to meet various business requirements including bridge financing and short term working capital requirements.

IFCI has taken an initiative to provide customized corporate advisory services and facilitating the financial re-engineering of various corporate house and companies. It assimilate the inputs gathered from vast and rich experience of project appraisal, documentation, syndication, product design in providing a customized Syndication & comprehensive end to end financial solution for corporate. Advisory: Further carry out debt and equity syndication and advisory serviced for client companies. In the area of providing customized corporate advisory services, IFCI has been able to secure new assignments relating to financial/investment appraisal, business reengineering and advisory activities.

IFCI also provides financing solutions to its clients through Structured Structured Debt/Mezzanine products and assists in providing optimal financing solutions for Products: various requirements such as sponsor financing, acquisition financing. Pre-IPO financing and Off-Balance Sheet structured Solutions amongst others.

B) SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

Small Industries Development Bank of India (SIDBI) set up on 2nd April 1990 under an Act of India Parliament. SIDBI acts as the Principal Financial Institution for Promotion, Financing, and Development of the Micro, Small, and Medium Enterprise (MSME) sector. SIDBI’s initiatives have remained aligned to the national goals of poverty alleviation, employment generation, kindling entrepreneurship, and fostering competitiveness in the MSME sector.

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Some of SIDBI’s key initiatives over more than the past 25 years of tirelessly promoting the growth of MSME’s include- 1. Providing cumulative assistance of around INR 5.40 lakh crore channelized into the MSME segment. 2. Directly impacting over 360 lakh persons/enterprises through its branch network of around 80 offices spread across the country as well as through the network of banks/institutions (having more than 1.25 lakh branches) across the country. 3. Extending loans, equity, and quasi-equity aggregation to INR 13,689 crore benefitting 356 lakh disadvantaged people, mostly women, through its Micro Finance operations. 4. Deepening its outreach by nurturing and evolving more than 100 MFIs who have emerged as strong and viable financial intermediaries serving the unserved. 5. Supporting more than 1.16 lakh budding and existing entrepreneurs by infusing skills and reskilling initiatives. 6. Facilitating Institutions Building by adopting a SIDBI Plus approach and creating its Subsidiary and Associated Institutions for providing impetus to the growth of the MSME ecosystem. 7. Developing a passionate pool of 1000+ Professionals with 22% women and 40% belonging to SC/ST and OBC category, for serving to the needs of the dynamic and consistently evolving MSME Sector.

KEY MILESTONES IN THE JOURNEY OF SIDBI

YEARS MILESTONES ACHIEVED 1990 Setting up of SIDBI 1994 Foundation of Microfinance laid 1995 Technology Bureau for Small Enterprise (TBSE) was set up which converted into India SME Technology Services 1999 Setting up of SIDBI Venture Capital Limited 2000 Setting up of Credit Guarantee Fund Trust for Micro and Small Enterprise 2005 (CGTMSE) 2008 Setting up of SMERA Ratings Ltd. 2015 Birth of India SME Asset Reconstruction Company Ltd. (ISARC) 2016 Set up MUDRA 2017 Trade Receivables Discounting System (TReDS) 2018 Lunched Certified Credit Counsellor (CCC) Lunch MSME Pulse and CriSidEx

4.4.3. REGIONAL RURAL BANK (RRB) Regional Rural Banks (RRBs) are Indian Scheduled Commercial Banks (Government Banks) operating at the regional level in the different State of India. They have been created with a view of serving primarily the rural areas of India with basic banking and financial services. However, RRBs may have branches set up for urban operation may include urban areas too.

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RRBs perform various functions in the following heads- 1. Providing banking facilities to rural and semi-urban areas. 2. Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions, etc. 3. Providing Para-Banking facilities like locker facilities, debit and credit cards, mobile banking, internet banking, UPI, etc. 4. Small financial banks. SALIENT FEATURES OF RRB Regional Rural Banks were established under the provisions of an Ordinance passed on 26th September 1975 and the RRB Act 1976. Their objective is to provide sufficient banking and credit facility for agriculture and other rural sectors. Five Regional Rural Banks were set up on 2nd October 1975, Gandhi Jayanti. These were set up on the recommendations of The Narsimham committee Working Group during the tenure of Indira Gandhi’s Government. The objective was to include rural areas into the economic mainstream since that time about 70% of the Indian Population was of Rural Orientation. 2nd October 1975, Gandhi Jayanti witnessed the forming of the first RRB, the Prathama Bank, Head Office at Moradabad (U.P.) with an authorized capital of Rs. 5 crores at its starting. Remaining four RRBs in the country one was Set up at Malda in West Bengal Under the name of Gour Gramin Bank, which was the first RRB in the Eastern Region of India. The current structure of RRBs is that Central Government owns 50%, Sponsorship Bank holds 35% and State Government holds 15%. There are 56 operational RRBs and the roadmap is to bring them down to 38 or below by merging them with other banks. 4.4.4. COOPERATIVE BANKS A cooperative bank is an institution established on a cooperative basis and dealing in the ordinary banking business. Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits, and grant loans. The cooperative banks, however, differ from joint-stock banks in the following manner - 1. Cooperative banks issue shares of unlimited liability, while the joint-stock bank's issue shares of limited liability. 2. In a cooperative bank, one shareholder has one vote whatever the number of shares he may hold. In a joint-stock bank, the voting right of a shareholder is determined by the number of shares he possesses. 3. Cooperative banks are generally concerned with rural credit and provide financial assistance for agricultural and rural activities. Joint-stock companies are primarily concerned with the credit requirements of trade and industry. 4. Cooperative banking in India is federal in structure. Primary credit societies are at the lowest rung. Then, there are central cooperative banks at the district level and state

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cooperative banks at the state level. Joint-stock banks do not have such a federal structure. 5. Cooperative credit societies are located in the villages spread over the entire country. Joint-stock banks and their branches mainly concentrate in the urban areas, particularly in the big cities. HISTORY OF COOPERATIVE BANKING IN INDIA The cooperative movement in India was started primarily for dealing with the problem of rural credit. The history of Indian cooperative banking started with the passing of the Cooperative Societies Act in 1904. The objective of this Act was to establish cooperative credit societies “to encourage thrift, self-help, and cooperation among agriculturists, artisans, and persons of limited means.” Many cooperative credit societies were set up under this Act. The Cooperative Societies Act, 1912 recognized the need for establishing new organizations for supervision, auditing, and supply of cooperative credit. These organizations were – (a) A union, consisting of primary societies (b) central bank and (c) Provincial banks. Although the beginning has been made in the direction of establishing cooperative societies and extending cooperative credit, the progress remained unsatisfactory in the pre-independence period. Even after being in operation for half a century. The cooperative credit formed only 3.1 percent of the total rural credit in 1951-52. STRUCTURE OF COOPERATIVE BANKING There are different types of cooperative credit institutions working in India. These institutions can be classified into two broad categories- agricultural and non- agricultural. Agricultural credit institutions dominate the entire cooperative credit structure. Agricultural credit institutions are further divided into short-term agricultural credit institutions and long-term agricultural credit institutions. The short-term agricultural credit institutions which cater to the short-term financial needs of agriculturists have three-tire federal structure- (a) At the apex, there is the state cooperative bank in each state’ (b) At the district level, there are central cooperative banks’ (c) At the village level, there are primary agricultural credit societies. Long-term agricultural credit is provided by the land development banks. Structure of cooperative credit institutions –

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Cooperative Credit Institutions

Agricultural Credit Non-Agricultural Institution Credit Institution

Short Term Credit Long term Credit Institutions Institutions (Land Development Banks)

Central Co-operative Primary Agricultural Credit State Co-operatives Banks Societies

There are 4 types of co-operative banks in India: • These banks are organized and operated at the district level and can be of two types - • Co-operative Banking Union Central Co- • Mixed control Co-operative Bank operative Banks • In the first, the members of the bank are the co-operative societies only. However, in the second, the members can be co-operative societies as well as individuals. The central co-operative banks lend money mainly to the affiliated primary societies with typical loan tenure lending between I to 3 years. • These banks are organized and operated at the district level and rest at the top of the hierarchy in the co-operative credit structure. State Co- With the help of State Co-operative Banks (SCBs), the RBI funds the operative Bank co-operative institutions. These banks also get loans at an interest rate of 1% to 2% lower than the standard bank rate. • These offer credit services in the urban and semi-urban regions. Thus they are not considered as agricultural credit societies. Primary Co- operative Banks • Primary Co-Operative Banks receive concessional refinance services from RBI and IDBI from time to time for them to offer housing loans and other types of loans that can be used by small businesses. • The land development banks are divided into three tiers which are primary, state, and central. These offer credit services to the farmers Land Development for developmental purposes. They used to be regulated by the RBI Banks as well as the state governments. However, this responsibility was recently transferred to the National Bank for Agricultural and Rural Development (NABARD).

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COMPARISON BETWEEN TRADITIONAL BANKS AND PAYMENTS BANKS Traditional Payment Banks Features Banks Accept Deposits Yes Yes Pay Interest on Deposits Yes Yes Withdrawal facility for customers Yes Yes Provide loans or involve in lending Yes No activities Yes No Issue credit cards Yes Yes Investment products No limit Rs. 1 lakh only per Maximum Deposit limit individual customer THE MAJOR DEVELOPMENTS OF INDIAN BANKING SECTOR IS CAPTURED IN THE FOLLOWING TABLE – Years Major Developments 1921 Closed market. State-owned Imperial Bank of India was the only bank existing.

1935 RBI was established as the central bank of the country. Quasi central banking role of Imperial Bank came to an end. 1936- Imperial Bank expanded its network to 480 branches. 1955 To increase penetration in rural areas, Imperial Bank was converted into the State Bank of India. 1956- Nationalization of 14 large commercial banks in 1969 & 6 more banks in 2000 1980. The entry of private players such as ICIC intensifying the competition. Gradual technology up-gradation in PSU banks. 2000 In 2003, Kotak Mahindra Finance Ltd received a banking license from RBI Onwards and become the first NBFC to be converted into a bank. In 2009, the government removed the Banking Cash Transaction Tax which had been introduced in 2005. 2018 As per Union Budget 2019 – 2020. The provision coverage ratio of banks onwards reached the highest in 7 years. As per RBI, as of November 30, 2018, India recorded foreign exchange reserves of approximately US$ 393.72 billion. SALIENT FEATURES ON INDIAN BANKING SYSTEM: 1. Mergers of several public sector banks are taking place. 2. Credit off-take has been rising due to - • Strong economic growth • Rising disposable income • Increasing consumerism • Increased access to credit 3. Ministry of Finance, Government of India launched the Financial Inclusion Index. This index will measure access, usage, and quality of financial services. 4. Department of Financial Services (DFS), Ministry of Finance, and National Informatics Centre (NIC) launched Jan Dhan Darshak as a part of the financial inclusion initiative. It is a mobile app to help people locate financial services in India.

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4.5. MUTUAL FUNDS A mutual fund is an investment security that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash, or a combination of those assets. • 1963 - The Mutual Fund industry in India started with formation of UTI by an Act of Parliament and functioned under the Regulatory and administrative control of the Reserve Bank of India (RBI). • 1978 - UTI was de-linked from the RBI and the Industrial First phase (1964 – Development Bank of India (IDBI) took over the regulatory and 1987) administrative control in place of RBI. • 1964 - Unit Scheme 1964 (US’64) was the first scheme launched by UTI. • 1988 - UTI had Rs. 6,700 crores of Assets Under Management (AUM).

• 1987 - Entry of public sector MFs set up by public sector banks, Second Phase ( 1987 LIC and GIC. - 1993) • 1987 - SBI MF was the first non-UTI MF set up in June 1987.

• 1992 - SEBI Act was passed. • 1993 - SEBI formed first set of MF Regulations which were not Third Phase (1993 - applicable on UTI. 2003) • 1993 - Kothari Pioneer (now merged with Franklin Templeton) was the first private sector MF established in India. • 2003 - There were total 33 MF companies in operations.

• 2003 - In February, UTI Act was repealed and UTI was divided into two entities i.e. (a) Specified Undertaking of Unit Trust of India (SUUTI) and UTI Mutual Fund. Fourth Phase (Feb • UTI MF started working under SEBI's regulations. 2003 - April 2014) • 2008-09 - Global Financial Crisis. • 2009 - SEBI abolished entry load in MF investments. • 2010-13 - Slow growth in Indian MF industry.

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• SEBI focused on enhancing penetration of MF products to smaller cities. • Since May 2014 - The Industry has witnessed steady inflows and increase in the AUM as well as the number of investor folios (accounts). • 31st May 2014 - The Industry’s AUM crossed the milestone of Rs. 10 Trillion (Rs. 10 Lakh Crore) for the first time. • July 2016 - AUM size has crossed Rs. 15 lakh crore. • The growth in the size of the Industry has been possible due to Fifth (Current Phase)- the twin effects of the regulatory measures taken by SEBI in re- Since May 2014 energising the MF Industry in September 2012 and the support from mutual fund distributors in expanding the retail base. • MF Distributors have been providing the much needed connect with investors. • MF distributors help convince investors to stay invested even at lower NAVs which happens when the market has fallen. • MF distributors have also had a major role in popularizing Systematic Investment Plans (SIP) over the years. • In April 2016, the no. of SIP accounts has crossed I crore mark and currently each month retail investors contribute around Rs. 3,500 crore via SIPs.

4.6. INSURANCE SECTOR

Number of Insurance Companies = 57

Life Insurers = 24 Non-life Insurers = 33

Public Sector Insurance Companies

Life Insurers Non-life Insurers 1. Life Insurance Corporation of India (LIC) 1. General Insurance Corporation Of India 2. The New India Assurance Company Limited 3. United India Insurance Company Limited 4. The Oriental Insurance Company Limited 5. National Insurance Company Limited 6. Agriculture Insurance Company of India Limited

Note:

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1. GIC Re is the sole Re-insurance public sector company in India 2. Government’s policy of insuring the uninsured has gradually pushed insurance penetration in the country and the proliferation of insurance schemes. 3. Overall insurance penetration (Premiums as % of GDP) in India reached 3.69 percent in 2017 from 2.71 percent in 2001.

GOVERNMENT INITIATIVE 1 AYUSHMAN BHARAT In September 2018, National Health Protection Scheme was launched under Ayushman Bharat to provide coverage of up to Rs 500.00 (US$ 7.723) to more than 100 million vulnerable families. The scheme is expected to increase the penetration of health insurance in India from 34 percent to 50 percent. 2 PRADHAN MANTRI FASAL Over 47.9 million farmers were benefitted under Pradhan BIMA YOJANA Mantri Fasal Bima Yojana (PMFBY) in 2017-18. 3 IPO GUIDELINES The Insurance Regulatory and Development Authority of India (IRDAI) plans to issue redesigned initial public offering (IPO) guidelines for insurance companies in India, which are to looking to divest equity through the IPO route. 4 BANK BONDS IRDAI has allowed insurers to invest up to 10 percent in

additional tier 1 (AT1) bonds that are issued by banks to augment their tier 1 capital, to expand the pool of eligible investors for the banks.

MAJOR EVENTS IN THE JOURNEY OF INDIAN INSURANCE SECTOR Major Events Years 1956 -72 All life insurance companies were nationalized to form LIC in 1956 to increase penetration and protect policyholders from mismanagement.

The non-life insurance business was nationalized to form GIC in 1972. 1993-99 Malhotra Committee recommended opening up the insurance sector to private players.

IRDA, LIC, and GIC Acts were passed in 1999. Making IRDA the statutory regulatory body for insurance and ending the monopoly of LIC and GIC. 2000-2014 Post liberalization, the insurance industry recorded significant growth; the number of private players increased to 46 in 2017. 2015 In 2015, the Government introduced Pradhan Mantri Suraksha Bima Yojna and Pradhan Mantri Jeevan Jyoti Bima Yojana.

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The government introduced Atal Pension Yojana and Health insurance in 2015. 2017 National Health Protection Scheme was proposed to be launched under onwards Ayushman Bharat, as per Union Budget 2018-19. Insurance companies raised more than US$ 6 billion from public issues in 2017.

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New distribution channels like bancassurance, online distribution and NBFCs have widened the reach and reduced costs. Firms have tied up with local NGOs to target lucrative rural markets. In October 2018, Indian e-commerce major Flipkart entered the insurance space in partnership with Bajaj Allianz to offer mobile insurance. Amazon India is also expected to enter the insurance market as an agent. In September 2018, India Post Payments Bank (IPPB) also partnered with Bajaj Allianz to distribute their products. Over the years, share of private sector in life insurance segment has grown from around 2 per cent in FY03 to 31.8 per cent in FY 19 (up to September 2018). In the non-life insurance segment, share of private sector increased to 55.70 per cent in FY 20 (up to April 2019) from 14.5 per cent in FY04. The life insurance sector has witnessed the launch of innovative products such as Unit Linked Insurance Plans (ULIPs). Other traditional products have also been customized to meet specific needs of Indian consumers. In September 2018, HDFC Ergo launched ‘E@Secure’ a cyber insurance policy for individuals. Large insurers continue to expand, focusing on cost rationalization and aligning business models to realize reported Embedded Value (EV), and generate value from future business rather than focus on present profits. In January 2019, online insurance distribution platform, Turtlemint raised US$25 million in funding. As on November 2018, HDFC Ergo is in advanced talks to acquire Apollo Munich Health Insurance at a valuation of around Rs.2,600 crore (US$370.05 million).

4.7. NON-BANKING FINANCE COMPANIES (NBFCS) A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/ construction of the immovable property. A non-banking institution which is a company and has the principal business

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of receiving deposits under any scheme or arrangement in one lump sum or instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company). NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below: i. NBFC cannot accept demand deposits; ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself; iii. The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks. DIFFERENT TYPES OF NBFCS NBFCs are categorized (a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, (b) non-deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC – ND), and (c) by the kind of activity they conduct. Within this broad categorization, the different types of NBFCs are as follows-

Asset Finance Company (AFC)

An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handing equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate on financing real/physical assets supporting economic activity and income arising there from is not less than 60% of its total assets and total income respectively.

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Investment Company (IC)

IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.

Loan Company (LC)

LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

Infrastructure Finance Company (IFC)

IFC is a non-banking finance company (a) which deploys at least 75 percent of its total assets in infrastructure loans, (b) has a minimum Net Owned Funds of Rs. 300 crore, (c) has a minimum credit rating of ‘A’ or equivalent (d) and a CRAR of 15%.

Systemically Important Core Investment Company (CIC-ND-SI)

CIC – ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:- (a)it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies; (b)its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets; (c)it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment; (d)it does not carry on any other financial activity referred to in Section 45 I(c) and 45 I (f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies; (e)Its asset size is Rs. 100 crore or above and (f)It accepts public funds.

Infrastructure Debt Fund

Non-Banking Financial Company (IDF-NBFC): IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

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Non-Banking Financial Company - Micro Finance Institution Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria- • Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 1,00,000 or urban and semi-urban household income not exceeding Rs. 1,60,000. a.Loan amount does not exceed Rs. 50,000 in the first cycle and Rs. 1,00,000 in subsequent cycles; b.total indebtedness of the borrower does not exceed Rs. 1,00,000; c. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty; d.loan to be extended without collateral; e.Aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs. f. Loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower. Non-Banking Financial Company - Factors Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income. Mortgage Guarantee Companies(MGC) MGC are financial institutions for which at least 90% of the gross income is from mortgage guarantee business and net owned fund is Rs. 100 crore.

Non-Operative Financial Holding Company (NOFHC) Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / prompter groups will be permitted to set up a new bank. It’s a wholly owned Non-Operative Financial Holding Company (NOFHC)which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

4.8. BASICS OF CAPITAL MARKET The history of the capital market in India dates back to the eighteenth century when East India Company securities were traded in the country. Until the end of the nineteenth century, securities trading was unorganized and the main trading centres were Bombay (now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the chief trading centre wherein bank shares were the major trading stock. During the American Civil War (1860-61). Bombay was an important source of supply for cotton. Hence, trading activities flourished during the period, resulting in a boom in share prices. This boom, the first in the history of the Indian capital market, lasted for a half a decade. The first joint-stock company was established in 1850. The bubble burst on July 1. 1865, when there was a tremendous slump in share prices. Trading was at that time limited to a dozen brokers; their trading place was under a banyan tree in front of the Town Hall in Bombay. These stockbrokers organized an

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informal association in 1875-Native Shares and Stock Brokers Association. Bombay. The stock exchanges in Calcutta and Ahmedabad, also industrial and trading centres; came up later. The Bombay Stock Exchange was recognized in May 1927 under the Bombay Securities Contracts Control Act, 1925. Indians remained largely inactive till the 1970s. Partial liberalization of the economy and pro-capital market policies during the 1980s infused some life into the markets, but it was only the economic liberalization of the 1990s that provided a lasting impetus. Today, segments of India’s capital markets are comparable with counterparts in many of the advanced economies in terms of efficiency (price discovery), traceability (low impact cost), resilience (co-movement of rates across product classes, and yield curves), and stability. In particular, their ability to withstand several periods of stress, notably the Asian financial crisis in 1997-98, the global financial crisis in 2007-09, and the “taper tantrum” episode in 2013, is a sign of their increasing maturity. TYPES OF SHARES AND DEBENTURES TYPES OF SHARES EQUITY SHARE CAPITAL Equity shares, also known as ordinary shares or common shares represent the owners’ capital in a company. The holders of these shares are the real owners of the company. They have control over the working of the company. Equity shareholders are paid dividends after paying it to the preference shareholders. The rate of dividend on these shares depends upon the profits of the company. They may be paid a higher rate of dividend or they may not get anything. Equity share is a main source of finance for any company giving investors the rights to vote, share profits, and claim on assets. Various types of equity share capital are authorized, issued, subscribed, paid-up, rights, bonus, sweat equity, etc. The expression of the value of equity shares is in terms of the face value or par value, issue price, book value, market value, intrinsic value, stock market value, etc. Normally, a company is started with equity finance as its first source of capital form the owners or promoters of that company. After a certain level of growth, there is a requirement for more capital for further growth. The company then finds an investor in the form of friends, relatives, venture capitalists, mutual funds, or any such small group of investors and issue fresh equity shares to these investors. A point comes where the company reaches a very big level and requires huge capital investment for business growth. Initial Public Offer (IPO) is the offer of shares which the company makes to the general public for the first time and Follow on Public Offer (FPO) is more such offers in the future to the public.

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TYPES OF EQUITY SHARE CAPITAL / SHARES

Authorised Share Capital

Issued Share Capital

Subscribed Share Capital

Paid Up Capital

Rights Share Types ofCapital Share Equity Types

Sweat Equity Share

1. Authorized Share Capital: It is the maximum amount of capital that a company can issue. The companies can increase it from time to time. However, for that we need to comply with some formalities also have to pay some fees to the legal bodies. 2. Issued Share Capital: It is that part of authorized capital which the company offers to the investors. 3. Subscribed Share Capital: It is that part of issued capital which an investor accepts and agrees upon. 4. Paid-up Capital: It is the part of the subscribed capital, which the investors pay. Normally, all companies accept complete money in one shot and therefore issued, subscribed and paid capital becomes the same. Conceptually, paid-up capital is the amount of money that a company invests in the business. 5. Right Shares: These shares are those which a company issues to its existing shareholders. The company issues such kinds of shares to protect the ownership rights of the existing investors. 6. Sweat Equity Shares: Sweat equity shares are issued to exceptional employees or directors of the company for an exceptional job in terms of providing know-how or intellectual property rights to the company. PREFERENCE SHARE CAPITAL Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.

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TYPES OF PREFERENCE SHARES

Cumulative Preference Shares

Non - Cumulative Preference Shares

Redeemable Preference Shares

Participating Preference Shares

Non- Participating Preference Shares Types of Shares Preference Types Convertible Preference Shares

Non - Convertible Preference Shares

1. Cumulative Preference Shares: The preference dividend is payable if the company earns an adequate profit. However, cumulative preference shares carry additional features which allow the preference shareholders to claim unpaid dividends of the years in which dividend could not be paid due to insufficient profit. 2. Non-Cumulative Preference Shares: The holders of non-cumulative preference shares will get preference dividends if the company earns sufficient profit but they do not have the right to claim unpaid dividends which could not be paid due to insufficient profit. 3. Redeemable Preference shares: Redeemable preference shares are those shares that are redeemed or repaid after the expiry of a stipulated period. 4. Participating Preference shares: Participating preference shareholders are entitled to share the surplus profit and surplus assets of the company in addition to preference dividends. 5. Non-participating Preference shares: Non-participating preference shareholders are not entitled to share surplus profit and surplus assets like participating preference shareholders. 6. Convertible Preference Shares: The holders of convertible preference shares are given an option to convert whole or part of their holding into equity shares after a specific period. 7. Non-convertible Preference shares: The holders of non-convertible preference shares do not have the option to convert their holding into equity shares i.e., they remain as preference share till their redemption.

DEBENTURES A company may raise long-term finance through public borrowings. These loans are raised by the issue of debentures. “A debenture is a document under the company’s seal

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which provides for the payment of principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the company’s property or undertaking and which acknowledges a loan to the company”. A debenture holder is a creditor of the company. A fixed-rate of interest is paid on debentures. The interest on debentures is a charge on the profit and loss account of the company. The debentures are generally given a floating charge over the assets of the company. When the debentures are secured, they are paid on priority in comparison to all other creditors. TYPES OF DEBENTURES

Secured Debentures

Unsecured Debentures

Redeemable Debentures

Irredeemable Debentures

Fully Convertible Debentures Types of Debentures Types Partially Convertible Debentures

Non - Convertible Debentures

1. Secured Debentures: These are debentures that are secured against an asset/asset of the company. This means a charge is created on such an asset in case of default in repayment of such debentures. Son in case, the company does not have enough funds to repay such debentures, the said asset will be sold to pay such a loan. The charge may be fixed, i.e., against specific assets/assets or floating i.e., against all assets of the firm. 2. Unsecured Debentures: These are not secured by any charge against the assets of the company, neither fixed nor floating. Normally such kinds of debentures are not issued by companies in India. 3. Redeemable Debentures: These debentures are payable at the expiry of their term. This means at the end of a specified period they are payable, either in the lump sum or in instalments over a time period. Such debentures can be redeemable at par, premium, or a discount. 4. Irredeemable Debentures: Such debentures are perpetual. There is no fixed date at which they become payable. They are redeemable when the company goes into the liquidation process. Or they can be redeemable after an unspecified long-time interval. 5. Fully Convertible Debentures: These shares can be converted to equity shares at the option of the debenture holder. So, if wishes then after a specified time interval all his shares will be converted to equity shares and he will become a shareholder.

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6. Partly Convertible Debentures: Here the holders of such debentures are given the option to partially convert their debentures to shares. If he opts for the conversion, he will be both a creditor and a shareholder of the company. 7. Non-Convertible Debentures: As the name suggests such debentures do not have an option to be converted to shares or any kind of equity. These debentures will remain so till their maturity, no conversion will take place. These are the most type of debentures. 8. Bearer Debentures are those which are payable to the bearer thereof. These can be transferred merely by delivery. Interest is paid to the person who Produces the interest coupon attached to such debentures. 9. Registered Debentures are those which are payable to the persons who appear in the Register of debenture holders. These can be transferred only by executing a transfer deed. Interest is paid to the registered holder. FINANCIAL ASSISTANCE SCENARIO FOR SMALL AND MEDIUM ENTERPRISES AND START-UPS 1. Financial Assistance Scenario for Small and Medium Enterprises in India. There are various schemes launched by the Ministry of Micro, Small and Medium Enterprises, and the government of India of providing financial assistance to the SME sector. However, in this section, we would restrict our discussion to certain selected schemes. a) Scheme of Fund for Regeneration of Traditional Industries (SFURTI) b) Related Scheme Scheme of Fund for Regeneration of Traditional Industries (SFURTI).

Description The objectives of the scheme are to organize the traditional industries and artisans into clusters to make them competitive and provide support for their long term sustainability, sustained employment, to enhance the marketability of products of such clusters, to equip traditional artisans of the associated cluster with the improved skills, to make provision for common facilities and improved tools and equipment for artisans, to strengthen the cluster governance systems with the active participation of the stakeholders, and to build up innovated and traditional skills, improved technologies, advanced process, market intelligence and new models of public-private partnerships, to gradually replicate similar models of cluster-based regenerated traditional industries. The financial assistance provided for any specific project shall be subject to a maximum of Rs. 8 (eight) crores to support Soft, Hard, and Thematic interventions.

Nature of Non-Government organizations (NGOs), institutions of the Central assistance and State Governments and semi-Government institutions, field functionaries of State and Central Govt., Panchayati raj

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institutions (PRIs), Private sector by forming cluster-specific Who can apply? (SPVs), corporate and corporate Responsibility (CSR) foundations with the expertise to undertake cluster development.

c) A Scheme for Promotion of Innovation, Rural Industries, and Entrepreneurship (ASPIRE)- Objectives of the Scheme- i. Create new jobs and reduce unemployment. ii. Promote entrepreneurship culture in India. iii. Grassroots economic development at the district level. iv. Facilitate innovative business solutions for un-met social needs. v. Promote innovation to further strengthen the competitiveness of the MSME sector. Nature of Assistance – 80 Livelihood business incubators (2014 – 2016) to be set up by NSIC, KVIC or Coir Board or any other Institution/agency of Gol /State Govt. on its own or by any of the agency/Scheme for promotion of Innovation, Entrepreneurship and Agro-Industry organization of the M/o MSME, one-time grant of 100% of the cost of Plant and Machinery other than the land and infrastructure or an amount up to Rs. 100 lakhs whichever is less to be provided. In case of incubation centre sot be set up under PPP mode with NSIC, KVIC, or Coir Board or any other Institution/agency of Gol/State Govt., one-time grant of 50% of the cost of Plant & Machinery other than the land and infrastructure of Rs. 50.00 lakhs, whichever is less to be provided. Assistance towards the training cost of incubates will be met out of the ATI scheme of the Ministry as far as possible for both centres. d) Entrepreneurship and Skill Development Programme (ESDP) Related Scheme Entrepreneurship Skill Development Programme (ESDP)

Description Entrepreneurship Development Programmes are being organized regularly to nurture the talent of youth by enlightening them on various aspects of industrial activity required for setting up MSEs. These EDPs are generally conducted in ITIs. Polytechnics and other technical institutions, where skill is available to motivate them towards self-employment.

Nature of assistance 20% of the total targeted of ESDPs are conducted exclusively for weaker sections of the society i.e. (SC/ST/women and PH) with a stipend of Rs. 500/- per month per candidate under the Promotional Package for (Micro, Small Enterprises) MSEs. No Who can apply? fee is charged from the candidates under these programs. These programs are conducted by MSME-DIs of Ministry e) Schemes of National Small Industries Corporation (NSIC)- The schemes of National Small Industries Corporation are as under.

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Single Point Registration – The Government is the single largest buyer of a variety of goods. To increase that share of purchases from the small-scale sector, the Government Stores Purchase Programme was launched in 1955-56. NSIC registers Micro & Small Enterprises (MSEs) under the Single Point Registration scheme (SPRS) for participation in Government Purchases. 2. Financial Assistance for Start-Ups There are numerous schemes launched by the Government of India for financing start-ups. However, this section covers only three finance schemes i.e. a) The Venture Capital Assistance Scheme; b) Support for International Patent Protection in Electronics & International Patent Protection in Electronics & Information Technology (SIP-EIT) and c) Stand-up India for Financing SC/ST and /or Women Entrepreneurs d) The Venture Capital Assistance Scheme: This scheme is run by the Ministry of Agriculture and Farmers' welfare. Venture Capital Assistance is financial support in the form of an interest-free loan provided by SFAC to qualifying projects to meet the shortfall in the capital requirement for the implementation of the project. The benefits of the Venture Capital Assistance Scheme are as under - i. Help in assisting agripreneurs to make investments in setting up agribusiness projects through financial participation. ii. Provides financial support for the preparation of bankable Detailed Project Reports (DPRs) through the Project Development Facility (PDF). Eligibility Criteria (Who can apply)-

Partnership/ Self Help Companies Groups Proprietary Agripreneurs Firms

Units in Producer agriexport Groups zones

Venture Agriculture graduates Capital Farmers Individually or in Assistance groups for setting up Scheme agribusiness projects.

a) Support for International Patent Protection in Electronics & Information Technology (SIP-EIT): This scheme is managed by the Ministry of Electronics & Information Technology. SIP-EIT is a scheme to provide financial support to MSMEs and Technology Start- up units for international patent filing to encourage innovation and recognize the

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value and capabilities of global IP along with capturing growth opportunities in the ICTE sector. Eligibility Criteria: 1. The Applicant should be registered under the MSME Development Act 2006 of the Government of India as amended from time to time as an MSME unit as per the criteria for such registration (the applicant would be required to furnish the proof of such registration). 2. The applicant should be a registered company under the Companies Act of Government of India and should fulfil the investment limits in plant and machinery or equipment as defined in the MSME Development Act 2006 of the Government of India as amended from time to time (these criteria will be ascertained from the proof of such registration and last audited balance sheet of the applicant) 3. The applicant should be a registered STP Unit and should fulfil the investment limits in plant and machinery or equipment as defined in the MSME Development Act 2006 of the Government of India as amended from time to time (these criteria will be ascertained from the proof of such registration and last audited balance sheet of the applicant). 4. The applicant should be a technology incubation enterprise or a start-up located in an incubation centre/park and registered as a company (a certification from the incubation centre/park, in this case, is mandatory) and should fulfil the investment limits in plant and machinery or equipment as defined in the MSME Development Act 2006 of Government of India as amended from time to time (these criteria will be ascertained from the proof of such registration and last audited balance sheet of the applicant).

b) Stand-Up India of Financing SC/ST and/or Women Entrepreneurs: This scheme is managed by the Small Industries Development Bank of India (SIDBI). Stand Up India Scheme facilitates bank loans between 10 lakh and 1 crore to at least one scheduled caste (SC) or Scheduled Tribe, borrower, and at least one woman per bank branch for setting up a Greenfield enterprise. This enterprise may be in manufacturing, services, or the trading sector. In the case of non-individual enterprises, at least 51% of the shareholding and controlling stake should be held by either an SC/ST or Woman entrepreneur. Eligibility 1. SC/ST and / or women entrepreneurs; above 18 years of age. 2. Loans under the scheme are available for only the Greenfield project. Green Field signifies, in this context, the first-time venture of the beneficiary in the manufacturing or services or trading sector. 3. In the case of non-individual enterprises, 51% of the shareholding and controlling stakes should be held by either SC/ST and /or Women Entrepreneur 4. The borrower should not be in default to any bank or financial institution.

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CHAPTER 5 – INDIAN ECONOMY

5.1 PRIMARY (AGRICULTURE AND ALLIED ACTIVITIES) Agriculture is the primary source of livelihood for about 58 % of India's population. Gross value added by agriculture, forestry, and fishing is estimated at rupees 18.53 trillion in the financial year 2018. The Indian food industry is poised for huge growth, increasing its contribution to world food trade every year due to its immense potential for value addition, particularly within the food processing industry. The Indian food and grocery market are the world's sixth- largest, with retail contributing 70% of the sales. The Indian food processing industry accounts for 32% of the country's total food market, one of the largest industries in India and is ranked fifth in terms of production, conjunction, export, and expected growth. It contributes around 8.80 and 8.39 % of gross value added in manufacturing and agriculture respectively, 13% of India's exports and 6% of total industrial investment. 5.1.1. MAJOR INVESTMENTS According to the Department for Promotion of Industry and Internal Trade (DPIIT), the Indian food processing industry has cumulatively attracted Foreign Direct Investment equity inflow of about US dollar 9.08 billion between April 2000 and March 2019. Some major investments and development in agriculture are as follows-

Investments worth rupees 8500 crore have been announced in India for ethanol production.

The first Mega Food Park in Rajasthan was inaugurated in March 2018.

Agri-food start-ups in India received funding of US dollar 1.6 billion between 2013-17 in 558 deals.

In 2017, agriculture sector in India witness 18 M&A deals worth US Dollar 251 million.

5.1.2. MAJOR GOVERNMENT INITIATIVES Some of the recent major government initiatives in the sector are as follows- 1. The Prime Minister of India launched the Pradhan Mantri Kisan Samman Nidhi Yojana and transferred Rupees 2,021 crore to the bank accounts of more than 10 million beneficiaries on 24 February 2019. 2. The Government of India has come out with the transport and marketing assistance scheme to provide financial assistance for the transport and marketing of Agricultural Products to boost agriculture exports. 3. Agriculture export policy, 2018 was approved by the government of India in December 2018. The new policy aims to increase India’s agricultural exports to US Dollar 60

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billion by 2022 and US dollar 100 billion in the next few years with a stable trade policy regime. 4. In September 2018, the Government of India announced rupees 15,053 crore procurement policy named ‘Pradhan Mantri Aay Sanrakshan Abhiyan’ (PM AASHA), under which states can decide the compensation scheme and can also partner with private agencies to ensure fair prices for farmers in the country. 5. In September 2018, the Cabinet Committee on Economic Affairs (CCEA) approved a Rupees 5,500 crore assistance package for the sugar industry in India. 6. The Government of India is going to provide rupees 2000 crore for the computerisation of the Primary Agricultural Credit Society (PACS) to ensure cooperatives are benefited through digital technology. 7. With an aim to boost innovation and entrepreneurship in agriculture, the Government of India is introducing a new AGRI UDAAN program to mentor start-ups and to enable them to connect with potential investors. 8. The Government of India has launched the Pradhan Mantri Krishi Sinchai Yojana with an investment of rupees 50,000 crores in the development of irrigation sources for providing a permanent solution from drought. 9. The Government of India plans to triple the capacity of the food processing sector in India from the current 10% of agriculture produce and has also committed Rupees 6000 crore as an investment for Mega Food Parks in the country, as a part of the scheme for Agro Marine Processing and Development of Agro-Processing Clusters (SAMPADA). 10. The Government of India has allowed a hundred percent FDI in the marketing of food products and food product E-Commerce under the automatic route. 5.2. SECONDARY (MANUFACTURING) Manufacturing has emerged as one of the highest growing sectors in India. The Prime minister of India, Mr. Narendra Modi, has launched the Make in India program to place India on the world map as a manufacturing hub and give global recognition to the Indian economy. India is expected to become the fifth largest manufacturing country in the world by the end of the year 2020. 5.2.1. MAJOR INVESTMENTS 1. With the help of Make in India drive, India is on the path of becoming the hub for high tech manufacturing as Global Giants such as GE, Siemens, HTC, Toshiba, and Boeing Weather setup are in the process of setting up manufacturing plants in India, attracted by more than a billion consumer and increasing purchasing power. 2. Foreign Direct Investment (FDI) in India's manufacturing sector reached US dollar 76.82 billion during April 2002-June 2018. 3. The major investments and development in the sector in the recent past are - a) As of December 2018, premium smartphone maker OnePlus is anticipating that India will become its largest research and development within the next three years. b) India's manufacturing PMI stood at 51.7 in May 2019. Also, companies start to spend more on hiring and anticipate good growth and prospects.

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c) As of October 2018, Filatex India, a polymer manufacturer, is planning to undertake forward integration by setting up a fabric manufacturing and processing unit. d) As of August 2018, IISC’s Society of Innovation and Development and Wipro 3D are collaborating to produce India's first industrial-scale 3D printing machine. e) For its commercial vehicles, Ashok Leyland is utilizing machine learning algorithms and its newly created telematics unit to improve the performance of the vehicle, driver, and so on. 5.2.2. MAJOR GOVERNMENT INITIATIVES The Government of India has taken several initiatives to promote a healthy environment for the growth of the manufacturing sector in the country. Some of the notable initiative and developments are - 1. In October 2018, the Government of India released the draft National Policy on Electronics (NPE) which has envisaged the creation of a US dollar 400 billion electronics manufacturing industry in the country by 2025. 2. In September 2018, the Government of India exempted 35 machine parts from basic customs duty to boost mobile handset production in the country. 3. The government of India is in the process of coming up with a new industrial policy that envisions the development of a globally competitive Indian industry. As of December 2018, the policy has been sent to the Union Cabinet for approval. 4. In the Union budget 2018-19, the Government of India reduced the income tax rate to 25% for all companies having a turnover of up to Rupees 250 crore. 5. Under the mid-term review of Foreign Trade Policy 2015-20, the Government of India increased export incentives available to the labour-intensive MSME sector by 2%. 6. The Government of India has launched a phased manufacturing program aimed at adding more smartphone components and the make in India initiative thereby giving a push to the domestic manufacturing of mobile handsets. 7. The Government of India is in talks with stakeholders to further ease Foreign Direct Investment in defense under the automatic route to 51% from the current 49%, to give a boost to the make in India initiative and to generate employment. 8. The Ministry of Defence, Government of India, approved the ‘Strategic Partnership’ model which will enable private companies to tie up with foreign players for manufacturing submarines, fighter jets, helicopters, and armored vehicles. 9. The Union Cabinet has approved the Modified Special Incentive Package Scheme (M- SIPS) in which proposals will be accepted till December 2018 or up to an incentive commitment limit of Rupees 10,000 crore.

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5.2.3. WAY FORWARD

India is an attractive for foreign investments in the manufacturing sector. Mobile phone, luxury and automobile brands, among others have set up or are looking to establish their manufacturing bases in the country. The manufacturing sector of India has the potential to reach US Dollar 1 trillion by 2025 and India is expected to rank amongst the top three growth economies and manufacturing destinations of the world by the year 2020. The implementation of the Goods and Service Tax (GST) which will make India a common market with the GDP of US dollar 2.5 trillion along with a population of 1.32 billion people, which will be a big draw for investors. With impetus on development of the industrial corridor and smart cities, the government aims to ensure Holistic development of the nation. The corridors would further assist in integrating, monitoring and developing a conductive environment for the industrial development and will promote advance practices in manufacturing.

5.3. TERTIARY (SERVICES) The services sector is a key driver of India's economic growth. Nikkei India services purchasing managers index food at 53.8 in May 2018, indicating an expansion but fall in June 2019 to 49.6. Strong Overseas demand and new export business opportunities help to boost total sales in the country. Services exports are a key driver of India's growth. India ranked as the eighth largest exporter of commercial services in the world in 2017. India has the second-largest telecommunication market and has the second-highest number of internet users in the world. 5.3.1. MAJOR GOVERNMENT INITIATIVE

•It is aimed at promoting export of services from India by providing duty scrip credit for eligible export. Services exports from •Under this scheme, a reward of 3 to 5 percent of net foreign exchange earned is given India scheme- for Mode 1 in Mode 2 services. •In the mid-term review of FTP 2015-20, SEIS incentives to notified services were increased by 2%.

National •The national Digital Communications policy 2018 and envisages 3 missions. Digital •1. Connect India: Creating Robust Digital Communications Infrastructure. Communicatio •2. Propel India: Enabling Next Generation Technologies and Services through Investments, ns Policy Innovation and IPR generation. 2018 •3. Secure India: Ensuring Sovereignty, Safety and Security of Digital Communications.

National •Formulation of national tourism policy 2015 that would encourage the citizens of India to Tourism Policy explore their own country as well as position the country as a must-see destination for 2015 global travellers.

National •The Union Cabinet, Government of India, has approved the National Health Policy 2017, Health Policy which will provide the policy framework for achieving universal health coverage and 2017 delivering quality healthcare services to all at an affordable cost.

National •The new 2016 national education policy considers education as an at most important Education parameter in the country. The 2016 in NEP majorly focuses on quality of education as well Policy 2016 as innovation and research in the sector.

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FDI Policy 100% FDI is allowed under automatic route in scheduled air transport service, regional air transport service and domestic scheduled passenger airline.

Approval of 100% FDI in aviation for foreign carriers.

100% FDI is allowed under the automatic route in tourism and hospitality, subject to applicable regulations and laws.

The Government of India allowed 100% FDI in the education sector through the automatic route since 2002.

For the healthcare sector, 100% FDI is allowed under the automatic route for greenfield projects and for brownfield project investments up to 100% FDI is permitted under the government route.

FDI cap in the telecom sector has been increased to 100 % from 74%; out of 100%, 49% will be done through automatic route and the rest will be done through the FIPB approval route.

Government has allowed hundred percent FDI in the railway sector for approved list of projects.

FDI limit for insurance companies has been raised from 26 % to 49% and 100 percent for insurance intermediate.

5.4. AGRICULTURAL AND INDUSTRIAL POLICIES OF INDIA 5.4.1. AGRICULTURAL POLICIES Agricultural Development policies during five-year plans are as under:

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Five Year Plan 1951-56

• The highest priority was recorded to increase in Agricultural production. Nearly one-third 31% of the total plan funds were allocated to the agriculture sector. River valley projects were taken up. Irrigation facilities and fertilizer plants were established.

Second Five-Year Plan 1956-61

• Focus on industrial growth and only 20% of plan allocation was devoted to agriculture. Food grain production exceeded the target due to the extension of irrigation facilities and the use of chemical fertilizers.

Third Five Year Plan 1961-66

• The priorities were self-sufficiency in food grains, meeting the raw material needs of industries, and an increase in export. During this period, the Green Revolution program was started on a small scale. But this plan failed to meet the target due to Chinese aggression 1962, Indo Pak war 1965, and severe and prolonged drought during 1955-56. There was a great crisis of food that forced Prime Minister L.B. Shastri to appeal to people to observe fast once a week. During next three annual plans agriculture recorded 6.9 % annual growth under the impact of the Green Revolution. The production of food grain touched 94 million tonnes.

Fourth Five Year Plan 1969-74

• It aimed at a 5% annual growth in food grains. High Yielding Variety (HYV) of seeds, fertilizer use, new agriculture techniques, and irrigation facilities provided to expand area of Green Revolution. The production of wheat increased sharply but growth in rice, oilseeds, and coarse grains was nominal, resulting in only 3% annual growth against the target of 5%.

Fifth Five Year Plan 1974-79

• It emphasizes on self-sufficiency in food production and poverty eradication. Stress was laid on the extension of irrigation, expansion in cultivated area under HYV seeds, and grant of loans and subsidies to farmers. Dry farming was propagated. This plan achieved its target successfully with 4.6 % growth. Almost all food grains except pulses witnessed increase in production.

Sixth Five Year Plan 1980-85

• It emphasized on land reforms, use of HYV seeds, chemical fertilizers, and groundwater resources and improving post-harvest technology as well as marketing and storage facilities. The annual growth rate was 6%, highest ever during plan periods. The food grain production reached 152 million tonnes.

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Seventh Five Year Plan 1985-90

• During this period, the highest growth in food grain, pulses and coarse cereals was recorded showing overall annual growth rate of 4%. The areas of the Green Revolution were expanded during the period.

Eighth Five Year Plan 1992-97

• This witnessed a tendency of stagnation in food grain production while oilseed registered rapid growth.

Ninth Five Year Plan 1997-02

• The ninth five-year plan witnessed mixed success. There were fluctuations in food grain production. during this plan period, National agriculture policy 2000, was framed and several measures were announced including watershed management, development of horticulture, agricultural credits, and Insurance Scheme for crops.

Tenth Five Year Plan 2002-07

• In the tenth plan focus was placed on- a.Sustainable management of water and land resources, b.Development of rural infrastructure to support agriculture, c. Dissemination of Agricultural Technology, d.Credit flow to the agriculture sector, e.Agricultural marketing reforms. • The new agricultural policy the Government of India has announced (28th July 2000) a new National agriculture policy 2000, in the light of changes arising out of economic liberalization and globalization. • The main aims of the policy were- a.Achieving more than 4% of annual growth rate in the agriculture sector, b.Growth based on efficient use of resources and conservation of soil, water, and biodiversity, c. Growth with equity in the region and among the farmers, d.The growth that caters to the domestic market and maximizes benefits from exports of agricultural products, and, e.Technologically, environmentally and economically sustainable growth.

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Eleventh Five Year Plan 2007-12

• National Food Security Mission- In 2007, the Government of India launched the national food security mission initiative to improve the country's overall crop production, especially that of rice, wheat and pulses. the primary objective was to introduce the logical components that include farm machines/ implements as well as improved variants of seeds, soil, plant nutrients, and plant protection measures. • The government aimed to increase the production of rice, wheat, and pulses by 10 million tonnes, 8 million tonnes and 2 million tonnes respectively by the end of 2012. it had allowed rupees 4883 crores to NFSM of which rupees 3381 crores were spent until 31st March 2011. through NFSM 25 million tonnes of additional food grain was produced in the eleventh five-year plan. • The following are the major achievements of the initiative- a.Implemented in about 312 districts, in spread across 17 States. b.Wheat production increased from 71.3 million tonnes in financial year 2007 to 80.3 million tonnes in the financial year 2010. c. Rice production increased from 89.4 million tonnes in financial year 2007 to 99.2 million tonnes in 2009; however, it declined to 87.6 million tonnes in financial year 2010. d.Pulse production increased from 13.6 million tonnes in financial year 2007 to 14.7 million tonnes in financial year 2010. e.Different districts were able to increase the food basket of the country. • Rashtriya Krishi Vikas Yojana- In the financial year 2008, the government introduced Rashtriya Krishi Vikas Yojana, with an outlay of rupees 25000 crores, to encourage States to increase public investment in agriculture and allied services. The program enables the adoption of national priorities as sub-schemes, thereby providing flexibility in project selection and implementation to state governments. • Various schemes under RKVY are as follows- a.Green Revolution in the Eastern region. b.Combining the development of 60000 pulses villages in rainfed areas. c. Encouraging the use of palm oil. d.Initiative on vegetable clusters. e.Nutri cereals. f. National mission for protein supplements initiative. g.Accelerated fodder development program. h.Rainfed area development program. i. Saffron mission.

Twelfth Five Year Plan 2012-17

• Agriculture sector through an average 1.6 % per annum in first four years as against the targeted 4% annual growth due to lower production. However, the Government of India took several steps for increasing investment in the agriculture sector such as enhance institutional credit to farmers, promotion of scientific warehousing infrastructure for increasing the shelf life of Agricultural produce, setting up of Agri Tech Infrastructure Fund for making farming competitive and profitable, developing commercial organic farming.

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5.4.2 INDUSTRIAL POLICIES Industrial policy is a statement of objectives to be achieved in the area of industrial development and the measure to be adopted towards achieving these objectives. The industrial policy thus formally indicates the spheres of activity of the public and the private sectors. It lays down rules and procedures that would govern the growth and pattern of industrial activity. 5.4.2.1. INDUSTRIAL POLICY RESOLUTION 1948 After having attained independence, the Government of India declared its first Industrial Policy on 6th April 1948. Salient Features of Industrial Policy, 1948 are as follows -

INDUSTRIAL 1. Strategic Industries (Public Sector): This category included three industries POLICY in which Central Government had monopoly. These included Arms and RESOLUTION ammunitions; Atomic energy and Rail transport. 1948 - Under this policy the large industries were 2. Basis/Key Industries (Public-cum-Private Sector): Six industries viz. coal, classified in four Iron and Steel, Aircraft manufacturing, Ship-building, Manufacture of categories viz. telephone, telegraph and wireless apparatus, and Mineral oil were Strategic designated as “Key Industries" or “Basic Industries”. It was decided that the Industries, new industries in this category will henceforth only beset-up by the Central Basic/Key Government. However, the existing private sector enterprises were allowed industries, to continue. Important Industries another 3. Important Industries (Controlled Private Sector): Eighteen industries were industries which kept in the “Important Industries” category. Such important industries respectively included heavy chemicals, sugar, cotton textile and woolen industry, cement, referred to Public paper, salt, machine tools, fertiliser, rubber, air and sea transport, motor, Sector; Public- tractor, electricity etc. These industries will continue to remain under private cum-Private sector however, the central government, in consultation with the state Sector; Controlled government, will have general control over them. Private Sector and Private & 4. Other Industries (Private and Co-operative Sector): All other industries Cooperative which were not included in the above mentioned three categories were left sector. open for the private sector. However, government could impose controls on these industries also if any of them was not working satisfactorily.

5.4.2.2. THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 Industries (Development and Regulation) Act, 1951 was passed by parliament in October 1991 to control and regular industrial development in the country. Its objectives were - 1. The regulation of industrial investment and production according to planned priorities and targets. 2. The protection of small entrepreneurs against the competition from larger industries. 3. Prevention of monopoly and concentration of ownership industries. 4. Balanced regional development with the view to reduce the disparity level of development of different regions of the country.

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PROVISIONS OF THE ACT The act laid down two provisions:

Restrictive provisions: Under this category, all the measures were designed to curb Reformative provisions the unfair practices adopted by industries

Registration and licensing of Direct regulation and control by industrial undertakings government Control on price, distribution, and Enquiry of listed industries supply

Cancelation of registration license Constructive measures

5.4.2.3. INDUSTRY POLICY RESOLUTION (IPR), 1956 Industrial Policy Resolution, 1956 replaced the IPR, 1948, It stressed on - 1. Speeding up the pace of industrialization, particularly heavy industries. 2. Expansion of the public sector and growth of the co-operative sector. 3. State to take up the responsibility of setting up new industrial set up and development of transport facilities. 4. Prevent private monopolies and concentration of economic processes in hands of few individuals. 5.4.2.4. NEW INDUSTRIAL POLICY OF INDIA, 1991 The new Industrial Policy was announced in July 1991 amid severe economic instability in the country. The objective of the policy was to raise efficiency and accelerate economic growth. Features of New Industrial Policy 1. Strengthening of Private Sector a) Abolition of the licensing system for a large number of industries. b) Greater role of the private sector envisaged. c) The contraction in the field of operations for public sector. 2. Dismantling of controls 3. Dispersing Industries a) Policy to shift industries away from big congested cities to rural and backward areas. b) Incentives were brought to attract industries to village and backward regions. c) Favored agro-based industries near the farming areas. LIMITING ROLE OF PUBLIC SECTOR Policy pointed out the grey area which was not fit for PSUs and needs to be vacated by them.

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LIBERALIZATION OF FOREIGN INVESTMENTS Foreign investment in the form of FDI allowed up to 50% with automatic approval. Foreign investment in export promotion activities. FOREIGN TECHNOLOGY HAD BEEN MADE EASY BY ALLOWING AUTOMATIC APPROVALS FOR TECHNOLOGY-RELATED AGREEMENTS PROMOTION OF SMALL-SCALE INDUSTRIES (SSI) It ensured an adequate supply of credit these industries based on their needs. To enable modernization and technical up gradation, the policy allows equity participation by other non-SSI undertakings in the SSI sector. The limited partnership was allowed to enhance the supply of risk capital to the SSI sector. It ensured the speedy payment towards the sale of products by the SSI sector. DOMESTIC REGULATORY REFORMS Reduced the number of reserve industries. Security and Industries of strategic concern were reserved for the public sector. Abolition of Industrial Licensing: It abolished the industrial licensing system for all industries except a few such as security and strategic concerns, social concerns, related to the safety and manufacture of hazardous industries. 5.5. BALANCE OF PAYMENT The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (Credits and liabilities (debts)) should balance, but in practice, this is rarely the case. Thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming. A country’s trade balance equals the value of its exports minus its imports. The formula is X – M = TB, Where, X = Exports M = Imports TB = Trade Balance With reference to India, the components of Balance of Payments (BOP) are as under - MAJOR ITEMS OF INDIA’S BOP A. CURRENT A/C [It records all the transactions that do not change the assets and liabilities status of a country. It is a flow concept, as it is measured over a period of time] 1. Export of Goods & Services

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2. Import of Goods & Services 3. Primary Income 4. Secondary Income B. CAPITAL A/C & FINANCIAL A/C [It records all the transactions that change the economic status of assets and liabilities of a country. It is a stock concept, as it is measured at a point of time] CHANGE IN RESERVES ( INCREASE / DECREASE )

C. Errors & Omissions (-) ( A+ B ) 5.5.1. FAVOURABLE AND UNFAVOURABLE BALANCE OF TRADE The balance of trade or Net Exports is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation’s imports and exports. A favorable balance of trade is known as a trade surplus and consists of exporting more than is imported; an unfavorable balance of trade is known as a trade deficit or, informally, a trade gap.

• When there is an excess of • When there is excess of imports

exports over imports, it is called over exports, it is called an Trade Trade favourable balance of trade. In unfavourable balance of trade. 1976 – 77 in India the imports In India in 1982-83 imports were were of value of INR 5073 crore of value INR 14,047 crore while while exports were of value of exports were of value of INR INR 5142 crore. Thus, balance of 8,637 crore. Balance of trade trade was + INR 69 crore. was INR-5410 crore. Further, it

Favourable Balance of Balance Favourable Further, it assists in strengthening create problems for an economy.

the economy of a country. Balance of Unfavourable

5.5.2. RECENT SCENARIO OF INDIA’S BALANCE OF TRADE India’s trade deficit narrowed to USD 13.45 billion in August 2019 from USD 17.92 billion in the same month last year and below market expectations of USD 13.60 billion. Merchandise exports fell 6.05 percent to USD 26.13 billion, due mainly to a 12.29 percent slump in sales of gems and jewellery. Meanwhile, major commodity groups posted positive growth: iron is (356.66 percent); electronic goods (45.89 percent); spices (35.35 percent); marine products (5.28 percent); and mica, coal & other ores, minerals (2.24 percent). Meanwhile, imports tumbled 13.45 percent to USD 39.58 billion as purchases fell for coal, coke, and briquettes (-23.75 percent). Organic & inorganic chemicals (-14.95 percent), petroleum, crude & product (-8.90 percent), machinery, electrical & inorganic chemicals (-8.80 percent) and electronic goods (-4.12 percent). Considering April-August 2019-20, the trade deficit narrowed to USD 72.85 billion from USD 83.19 billion in the same period of the previous fiscal year. Balance of Trade in

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India averaged – 2645.81 USD Million from 1957 until 2019, reaching an all-time high of 258.90 USD Million in March of 1977 and a record low of -20210.90 USD Million in October of 2012. 5.5.3. FOREIGN INVESTMENTS IN INDIA – TYPES AND FLOWS Any investment that is made in India with the source of funding that is from outside of India is foreign investment. By this definition, the investment that is made by Foreign Corporates, Foreign Nationals, as well as Non-Resident Indians would fall into the category of Foreign Investment. TYPES OF FOREIGN INVESTMENTS Funds from a foreign country could be invested in shares, properties, ownership/management, or collaboration. Based on this, Foreign Investments are classified as below-

FOREIGN INVESTMENT

FOREIGN DIRECT INVESTMENT FOREIGN PORTFOLIO INVEST FOREIGN INSTITUTIONAL (FDI) (FPI) INVESTMENT (FII)

Details on each of the foreign investment type can be found below:

• FDI is an investment made by a company or individual who us an entity in one country, in the form of controlling ownership in Foreign Direct business interests in another country. FDI could be in the form of Investment (FDI) either establishing business operations or by entering into joint ventures by mergers and acquisitions, building new facilities etc.

• Foreign Portfolio Investment (FPI) is an investment by foreign entities and non-residents in India securities including shared, Foreign Portfolio government bonds, corporate bonds, convertible securities, Investment (FPI) infrastructure securities et. The intention is to ensure a controlling interest in India at an investment that is lower than FDI, with flexibility for entry and exit.

• Foreign Institutional Investment (FPI) is an investment by foreign entities in securities, real property and other investment assets. Foreign Institutional Investors include mutual fund companied, hedge fund companies Investment (FII) etc. The intention is not to take controlling interest, but to diversify portfolio ensuring hedging and to again high return s with quick entry and exit.

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DIFFERENCE BETWEEN FDI AND FII FDI FII BASIS FOR COMPARISON Meaning When a company situated FII is when foreign in one country invests in a companies make company situated abroad, investments in the stock it is known as FDI market of a country Entry and Exit Difficult Easy What does it bring? Long term capital Long/Short term capital Transfer of Fund, resource, Funds only technology, strategies, know-how, etc. Economic Growth Yes No Consequences Increase in the country’s Increase in the capital of Gross Domestic Product the country (GDP) Target Specific Company No such target, investment flows into the financial market Control over a company Yes No DIFFERENCE BETWEEN FDI AND FPI BASIS FOR COMPARISON FDI FPI Meaning FDI refers to the When an international investment made by foreign investor, invests in the investors to obtain a passive holdings of an substantial interest in the enterprise of another enterprise located in a country, i.e., investment in different country the financial asset, it is known as FPI Role of investors Active Passive

Degree of control High Very less

Term Long term Short term

Management of Projects Efficient Comparatively less efficient

Investment in Physical assets Financial assets Entry and exit Difficult Relatively easy Results in Transfer of funds, Capital inflows technology, and other resources

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