Business Environment- Unit II- UPTU

UNIT IIBusiness Environment

Indian Financial System

• Monetary Policy• Fiscal Policy

Monetary Policy…Basics

Monetary policy is the process by which monetary authority of a country, generally

a central bank controls the supply of money in the economy by exercising its

control over interest rates in order to maintain price stability and achieve high

economic growth.

What is Monetary Policy??

• Monetary policy rests on the relationship between the rates of interest (price at which money can be borrowed)in an economy and the total supply of money.

• Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment

What is Monetary Policy?..

• Monetary theory provides insight into how to craft optimal monetary policy and can be either expansionary or contractionary.

• An expansionary policy increases the total supply of money in the economy more rapidly than usual

• Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.

Basic Approach to Monetary Policy

Contractionary policy expands the money supply more slowly than usual or even shrinks it.

Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.

Basic Approach to Monetary Policy…

History of Monetary Policy• For many centuries there were only two forms of monetary

policy: (i) Decisions about coinage; (ii) Decisions to print paper money to create credit. Interest rates, while now thought of as part of monetary authority, were not generally coordinated with monetary policy.

• With the creation of the Bank of England in 1694, which acquired the responsibility to print notes and back them with gold, the idea of monetary policy as independent of executive action began to be established.

History of Monetary Policy….• Central banks as part of the gold standard began setting the interest

rates which they charged, from borrowers who required liquidity. This required almost monthly adjustments of interest rates.

• During the 1870-1920 period, the industrialized nations set up central banking systems, with the role of the central bank as the "lender of last resort”.

• Later, economists evolved ways to control money for financial stability & growth. Classical economists /Monetarists emphasized ‘money supply’ where as Keynesian economists emphasized the ‘interest rate channel’.

Considerations for Monetary PolicyMonetary decisions today take into account a wider range of

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

Monetary Policy of India

Monetary Authority in India

• There are two monetary authorities in India: the Central government and the RBI. Central government is more powerful.

• The central monetary authority is the Reserve Bank of India (RBI)

• RBI formulates, monitors and regulates the monetary policy, which aims at financial stability in the country.

• The process of monetary policy formulation in India had traditionally been largely internal.

• The process has, over time, become more consultative and participative with an external orientation.

• Wide range of inputs taken from various stakeholders

Monetary Policy Formulation in India

• The three concerned research departments – – Monetary Policy Department (MPD)– Department of Economic and Policy Research (DEPR) and – Department of Statistics and Information Management (DSIM)

• Provide independent technical inputs and assessment

• Meeting chaired by the Governor and attended by the top management.


• Consultations are held with – 20 large commercial banks– Indian Banks Association (IBA), – Urban and rural co-operative bank/credit associations – Association of non-banking financial companies (NBFCs).

• Reserve Bank has constituted a technical advisory committee (TAC) on monetary policy with outside (foreign) experts, though its role remains advisory.


• Monetary policy framework is a continuously evolving process based on the– Level of development of financial markets and

institutions – Degree of global integration.

• Monetary policy framework in India has undergone significant transformation over time.

Monetary Policy Framework in India

• India followed a Monetary Targeting Framework during the mid-1980s till 1997-98 under which broad money (money supply-M3) was used as an intermediate target for monetary policy.

• Recognizing the challenges posed by financial liberalization, the Reserve Bank switched to a Multiple Indicator Approach in 1998-99.

• Under the multiple indicator approach, while broad money continued to remain an information variable, greater emphasis was placed on rates of interest for monetary policy formulation.

Monetary Policy Framework in India…

INSTRUMENTS OF MONETARY POLICY

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

Bank Rate of Interest• It is the interest rate which is fixed by the Central bank

to control the lending capacity of Commercial banks.

• During Inflation , RBI increases the bank rate of interest due to which borrowing power of commercial banks reduces which thereby reduces the supply of money or credit in the economy.

• When Money supply Reduces it reduces the purchasing power and thereby curtailing Consumption and lowering Prices.

Cash Reserve Ratio• CRR, or cash reserve ratio, refers to a portion of deposits (as

cash) which banks have to keep/maintain with the Central bank (RBI).

• During Inflation RBI increases the CRR due to which commercial banks have to keep a greater portion of their deposits with the RBI.

• This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.

Statutory Liquidity Ratio• Banks are required to invest a portion of their

deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.

• If SLR increases the lending capacity of commercial banks decreases thereby regulating the supply of money in the economy.

Open market Operations

• It refers to the buying and selling of Govt. securities in the open market.

• During inflation RBI sells securities in the open

market which leads to transfer of money to RBI. Thus money supply is controlled in the economy.

Currency Board• A currency board is a monetary arrangement that pegs the monetary

base of one country to another, the anchor nation.

• It essentially operates as a hard fixed exchange rate, whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate.

• Thus, to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board.

• This limits the possibility for the local monetary authority to inflate or pursue other objectives

• RBI is empowered to control credit on a qualitative basis i.e. on selective manner.

• SCC was first introduced in 1956 to check speculation activities in the market and thereby control the flow of credit selectively.

• Stricter controls are imposed on 6 basic groups of commodities:– Food grains, sugar, oil seeds, cotton, vegetable oils and

cotton textiles.

Selective Credit Control (SCC)

Introduction to

Fiscal Policy: Meaning, Objectives & Instruments

THE FISCAL POLICY

•Fiscal policy deals with the taxation and expenditure decisions of the government.

•Monetary policy, deals with the supply of money in the economy and the rate of interest.

Importance of Fiscal Policy

Popularity of the fiscal policy since the 1930s is due to:

• The ineffectiveness of monetary policy as a means of overcoming the severe unemployment of the Great Depression.

• The growing importance of government spending and taxation in relation to the economy's total income and output.

OBJECTIVES OF FISCAL POLICY

•The fiscal policy of the government as regards taxation, public borrowing and public expenditure is always formulated with specific objectives in view.

•These objective are to produce desirable effects and avoid undesirable effects on the national income, production, employment, and general price level

•Economic Stability Vs Economic Development

•In most modern economies, the government deals with fiscal policy while the central bank(RBI) is responsible for monetary policy.

The main instruments of fiscal policy are• Taxation

• Public borrowings,

• Forced saving (or deficit financing)

• Public expenditure .

INSTRUMENTS OF FISCAL POLICY

Taxation

•Taxation is the most important source of public revenue of both developed and developing countries.

•More important for developing countries, as the size of government’s development program depends largely on the economic and administrative capacity of its tax system to mobilize the necessary resource.


Public Borrowing•After taxation, public borrowing is the second most important source of public revenue. •It is different in nature from taxes, since all borrowing from the public must be repaid; fund-raising exercise.•Two ways to raise public debt

–Voluntary loan: Issue of bills & securities in money market –Compulsory loan: contribution to provident fund, pension fund etc..


Government SecuritiesGovernment security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or

long term (usually called Government bonds or dated securities with original maturity of one year or more).

In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).

Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.).

a. Treasury Bills (T-bills)Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the

Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. b. Cash Management Bills (CMBs)The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills,

they are also issued at a discount and redeemed at face value at maturity. c. Dated Government SecuritiesDated Government securities are long term securities and carry a fixed or floating coupon (interest rate)

which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years.

Forced Saving or Deficit Financing

• A new weapon in the armory of fiscal tools

• Deficit financing occurs when there is excess of expenditure over current revenue receipts

• It was used during the period of Great Depression in the 1930s to stimulate private investment.

INSTRUMENTS OF FISCAL POLICY….

• When a government spends more than what it currently receives in the form of taxes and fees during a fiscal year, it runs in to a deficit budget. When the budget deficit is financed by borrowing from the public and banks, it is called deficit financing.

• Deficit financing refers to the borrowing undertaken by the government to make up for the revenue shortfall. It is the best stimulant for the economy in short term. However, in the long term it becomes a drag on the economy and becomes the reason for rise in interest rate

Sources of Financing Deficit• There are three methods or sources which are used to finance budgetary

deficits. Each method of financing has its own macro economic implications.

• The methods of deficit financing are:(1) Bank borrowing.(2) Non-bank borrowing / Domestic Borrowing.(3) External borrowing.

Deficit Financing….

Public ExpenditureReasons for massive increase in public expenditure are• Building up of infrastructure and large capital goods industries.

• Meeting social obligation like provision of cheap or free public services, education, housing etc.

• Providing subsidies to various sectors particularly the farm sector.

• Undertaking various public works programs.

INSTRUMENTS OF FISCAL POLICY….

• Capital Formation– Fiscal policy of the country is playing an important role in increasing the rate of capital

formation in the public and private sectors.• Mobilization of Resources

– Fiscal policy of the country has been helping to mobilize a considerable amount of resources through taxation, public debt and other sources for financing its various developmental projects.

• Incentives to Savings– Providing various incentives to raise the saving rate both in household and corporate sector

by various budgetary policy changes like tax exemption, tax concession etc.• Inducement to Private Sector

– Various inducements like subsidies, tax exemptions, concessions etc. are provided to private sector to expand their activities.

• Reduction of Inequality– Progressive taxes on income and wealth tax exemption, subsidies etc.

• Export Promotion– Concessions and subsidies are provided by govt. to promote exports.

• Alleviation of Poverty and Unemployment– Various poverty eradication and employment generation programmes are employed in

order to reduce poverty and unemployment. Eg: IRDP (Integrated rural development prog), JRY (Jeevan Rekha Parishad)

Merits of Fiscal Policy of India

• Instability– Failed to achieve stability on various fronts. Growing volume of deficit

financing has created inflationary rise in price levels.• Defective Tax Structure

– Tax structure has failed to raise the productivity of direct taxes. Therefore country has been relying on indirect taxes.

• Inflation– Unable to stop the inflationary rise in price level. The higher rate of indirect

taxation has resulted in cost-push inflation.• Negative Return of the Public Sector

– In spite of having huge total investment in public sector, the return on investment has been mostly negative.

• Growing Inequality– The growing trend of tax evasion has made the tax machinery ineffective.

And the reliance on indirect taxes has made the tax structure as regressive.

Shortcomings of Fiscal Policy of India

India’s Fiscal Policy:Trends

OBJECTIVES OF FISCAL POLICY IN INDIA

• To improve the growth performance of the economy - mainly in two ways. • By mobilizing resources for development. • By improving the efficiency of resource

allocation

• Fiscal Policy also used to achieve equity.

THE FISCAL IMBALANCE

THEMES OF THE ‘NEW FISCAL POLICY’• A systematic effort to simplify both the tax structure and

the tax laws

• A deliberate shift to a regime of reasonable direct tax rates, combined with better administration and enforcement, to improve compliance and raise revenues

• The fostering of a stable and predictable tax policy environment

• Greater recognition and weight given to the resource allocation and equity consequences of taxation

• More reliance on nondiscretionary fiscal and financial instruments in managing the economy, as compared to adhoc, discretionary physical controls

• Concerted efforts to improve tax administration and reduce the scope for arbitrary harassment

• Growing appreciation of the links between fiscal and monetary policy;

• Fresh initiative to strengthen methods of expenditure control.

THEMES OF THE ‘NEW FISCAL POLICY’

STOCK MARKETAND TRADING

Introduction:• A company form of organisation is a business entity

which is established under provision of India`s Companies Act 1956, through promotion, incorporation and floatation.

WHAT IS A STOCK MARKET?

A stock market or equity market is a public entity for the trading of company stock (shares) and derivatives at an agreed price.

These are securities listed on a stock exchanges as well as those only traded privately.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization. The largest stock market in the USA, by market capitalization, is the NYSE.

Importance of Stock Market:

• Function and purpose:

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling

shares of ownership of the company in a public market.

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood.

An economy where the stock market is on the rise is considered to be an up-and-coming economy.

WHAT ARE STOCKS?

At some point, just about every company needs to raise money

In each case, they have two choices: Borrow the money, or Raise it from investors by selling them a stake

(issuing shares of stock) in the company

When you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings.

Individual stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done. Nevertheless, it's that ownership structure that gives a stock its value

WHAT IS A STOCK EXCHANGE ?• A market in which securities are bought and sold: "the

company was floated on the Stock Exchange".• The initial offering of stocks and bonds to investors is

by definition done in the primary market and subsequent trading is done in the secondary market.

• A stock exchange is often the most important component of a stock market.

• Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks.

ROLE OF STOCK EXCHANGE

• Raising capital for business:- common forms of raising capital-

• Mobilizing savings for investments.• Creating investment opportunities for small companies.• Government capital rising for development projects.• Facilitates company growth.

Going to public

Limited partnership

Venture capital

Corporate companies

HISTORY OF STOCK EXCHANGE

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

Initial members who are still running their business in

stock exchange areD.S.Prabhudas &company

Jamnadas Morarjee Champak lal Devidas

Brymohan Laxminarayan

BROKER AND JOBBERBROKER: He is one acts as a intermidiary on

behalf of others. A broker in a stock exchange ,is a commission agent who transacts business in securities on behalf of non members.

JOBBER: He is not allowed to deal with the public directly .He deals with brokers who are engaged with the investors . Thus, the securities is bought by the jobber from members and sells to members who are operating on the stock exchange as broker.

DIFFERENCES BETWEEN A JOBBER AND A BROKER

JOBBER A jobber is an independent

dealer in securities, purchasing or selling securities on his own account

A jobber deals only with the brokers ,does not deal with the general public

A jobber earns profit from his operations i.e., buying and selling activities

Each jobber specializes in certain group of securities

BROKER A broker deals with the jobber

on behalf of his clients. in other words, a broker is a middleman between a jobber and clients

A broker is merely an agent, buying or selling securities on behalf of his clients

A broker gets only commission for his dealings

The broker deals in all types of securities

SPECULATION AND SPECULATOR SPECULATION : It is the transaction of members to buy

or sell securities on stock exchange with a view to make profits to anticipated rise or fall in price of securities.

SPECULATOR : The dealer in stock exchange who indulge in speculation are called speculator . They do not take delivery of securities purchased or sold by them , but only pay or rescue the difference between the purchase price and sale price . The different types of speculators are

BULL BEAR STAG LAME DUCK

BULL {TEJIWALA}

He is speculator who expects the future raise in price of securities he buys the securities to sell them at future date at the higher price.

He is called as bull because his activities resembles as a bull , as the bull tends to throw its victims up in the air through its horns. In simple the bull speculator tries to raise the price of securities by placing a big purchase orders.

BEAR {MANDIWALA}

He is speculator who expects future fall in prices, he does an agreement to sell securities at future date at the present market rate .

He is called as bear because his altitude resembles with bear , as the bear tends to stamp its victims down to earth through its paws . In simple the bear speculator forces of prices of securities to fall through his activities.

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

LAME DUCK He is speculator when the

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

MAJOR STOCK EXCHANGES ECONOMY STOCK EXCHANGE

US & EUROPE NYSE

US & EUROPE (NORTH) NASDAQ

JAPAN TOKYO STOCK EXCHANGE

UNITED KINGDOM LONDON STOCK EXCHANGE

EUROPE EURONEXT

CHINA SHANGHAI STOCK EXCHANGE

HONG KONG HONGKONG STOCK EXCHANGE

CANADA TORONTO STOCK EXCHANGE

BRAZIL BM&F BOVESPA

ECONOMY STOCK EXCHANGE

AUSTRALIA AUSTRALIAN SECURITIES EXCHANGE

GERMANY DEUTSCHE BORSE

SWITZERLAND SIX SWISS EXCHANGE

CHINA SHENZHEN STOCK EXCHANGE

SPAIN BME SPANISH EXCHANGES

INDIA BOMBAY STOCK EXCHANGE

SOUTH KOREA KOREA EXCHANGE

INDIA NATIONAL STOCK EXCHNGE

RUSSIA MICEX – RTS

SOUTH AFRICA JSE LIMITED

SOME INDIAN STOCK EXCHANGESEXCHANGEBOMBAY STOCK EXCHANGE

NATIONAL STOCK EXCHANGE

JAIPUR STOCK EXCHANGE

UP STOCK EXCHANGE ASSOCIATIONMADRAS STOCK EXCHANGE

COCHIN STOCK EXCHANGE

BANGLORE STOCK EXCHANGE

GAUHATI STOCK EXCHANGE

LUDHIANA STOCK EXCHANGE

CALCUTTA STOCK EXCHANGE

LOCATION

MUMBAI

MUMBAI

JAIPUR

KANPUR

CHENNAI

COCHIN

BENGULURU

GAUHATHI

LUDHIANA

KOLKATA

NSE AND BSE ARE THE MAJOR STOCK EXCHANGES IN INDIA.

BOMBAY STOCK EXCHANGE BSE Limited formerly known as Bombay Stock

Exchange (BSE) , is the oldest stock exchange in Asia.

It is a stock exchange located on Dalal Street, Mumbai.

It the 6th largest stock exchange in Asia and the 14th largest in the world.

The BSE has the largest number of listed companies in the world.

The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia.

Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India.

While both have similar total market capitalization (about USD 1.6 trillion), share volume in NSE is typically two times that of BSE.

BSE BUILDING; BSE DISPLAYS SENSEX ; PEOPLE TRADING ATTHE BOMBAY STOCK EXCHANGE

NATIONAL STOCK

EXCHANGE ,

MUMBAI.

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

Stock trading Stock trading is not just buying and selling stocks at the

stock market, there are so many other factors that need to be taken care of for successful stock trading.

Anyone who invests in the stock market wishes to make profit from the investments. To ensure that you get significant return from your investment you have to pick up the right stocks at the right time.

If you have decided to trade in stocks the first thing that you need to decide is the stock market where you will trade.

BSE NSE

Number of listed companies

5,749 (as of Sep 2015) 1,696 (as of Sept 2015)

Market capitalization of listed companies

US$ 1.7 trillion (23 Jan 2015) US$ 1.65 trillion (23 Jan 2015)

Main IndexBSE Sensex S&P CNX Nifty

Index value25963 (as of Sep 2015) 7,899.15 (as of Sep 2015)

LocationMumbai, India Mumbai, India

Claim to fameOldest stock exchange in Asia.

Largest stock exchange in India in terms of daily turnover and

number of trades.

Website www.bseindia.com www.nseindia.com

Established in 1875 1992

General Market Advice:

1. Never chase a stock. 2. Buy when markets are in the grip of panic. 3. Only buy fundamentally strong stocks, which are

undervalued. 4. Buy stocks grown in top line and bottom line over the

past years. 5. Invest in companies with proven management. 6. Avoid loss-making companies. 7. PE Ratio and Growth in earnings per share are the

key.

8. Look for the dividend paying record. 9. Invest in stocks for sure returns. 10. Stocks have been the high yielding asset

class over the past. 11. The basic property of any asset class is to

grow. 12. Buy when everyone is selling and sell

when everyone buys. 13. Invest a fixed amount each month.

National Income in India, Concept and Measurement

Meaning of National Income• National income is the money value of all the final goods and

services produced by a country during a period of one year. National income consists of a collection of different types of goods and services of different types.

• Since these goods are measured in different physical units it is not possible to add them together. Thus we cannot state national income is so many millions of meters of cloth. Therefore, there is no way except to reduce them to a common measure. This common measure is money.

• If the value of a meter of cloth is Rs. 20 and the total cloth produced is 100 meters, then the money value of cloth is Rs. 2000. In this way we can find out the value of other goods and services and the total value of all the goods and services produced during one year.

Basic Concepts in National income

•Gross domestic product

•Gross domestic product at constant price and at current price

•Gross domestic product at factor cost and Gross domestic product at market price

Basic Concepts in National income

•Net domestic product

•Gross national product

•Net national Product

•Net national product at factor cost or national income

Gross Domestic Product

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

Gross Domestic Product•Domestic territory Means

a. Territory lying within the political frontiers, including territorial waters of the country.

b. Ships and aircrafts operated by the residents of the country between two or more countries.

Gross Domestic Productc. Fishing vessels, oil and natural gas rigs, and floating platform operated by the residents of the country in the international waters or engaged in extraction in areas in which the country has exclusive rights of exploitation.

d. Embassies, consulates and military establishment of the country located abroad.

Gross Domestic Product at Constant price and Current price

• GDP can be estimated at current prices and at constant prices. If the domestic product is estimated on the basis of the prevailing prices it is called gross domestic product at current prices.

• If GDP is measured on the basis of some fixed price, that is price prevailing at a point of time or in some base year it is known as GDP at constant price or real gross domestic product.

GDP at Factor cost and GDP at Market price

• The contribution of each producing unit to the current flow of goods and services is known as the net value added. GDP at factor cost is estimated as the sum of net value added by the different producing units and the consumption of fixed capital.

• Conceptually, the value of GDP whether estimated at market price or factor cost must be identical. This is because the final value of goods and services must be equal to the cost involved in their production.

• GDP F.C = GDP M.P – IT + S.

Net Domestic Product• While calculating GDP no provision is made for

depreciation allowance (also called capital consumption allowance). In such a situation gross domestic product will not reveal complete flow of goods and services through various sectors.

• A part of is therefore, set aside in the form of depreciation allowance. When depreciation allowance is subtracted from gross domestic product we get net domestic product.

• NDP = GDP – Depreciation.

Gross National Product•Gross national product is defined as the

sum of the gross domestic product and net factor incomes from abroad. Thus in order to estimate the gross national product of India we have to add net factor income from abroad - income earned by non-resident in India to form the gross domestic product of India.

•In brief GNP = GDP + NFIA.

Net National Product

•It can be derived by subtracting depreciation allowance from GNP. It can also be found out by adding the net factor income from abroad to the net domestic product.

•NNP = GNP - Depreciation

Net National Product

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

•NNP = NDP + NFIA

NNP at factor cost or National Income

• NNP at factor cost is the volume of commodities and services turned out during an accounting year, counted without duplication. It can also be defined as the net value added at factor cost in an economy during an accounting year.

• NNP at factor cost or national income is defined as the sum of domestic factor incomes and net factor income form abroad. If NNP figure is available at market price we will subtract indirect taxes and add subsidies to the figure to get NNP at factor cost or national income of the economy.

NNP at factor cost or National Income

• NNP at FC = National Income = FID + NFIA• FID factor income earned in the domestic territory of a

country.• Net Factor Income from Abroad.

•NNPFC = NI = NNPMP – IT + S

Personal Income and Disposable income

• Personal income and disposable income are two concepts of national income very commonly used in advanced countries.

• Personal income may be defined as the current income of persons or households from all services. Personal income is not a measure of production.

Disposable Income• All personal income is not at the disposal to be spent on

consumption. Individuals have to pay personal direct taxes to the government. They are free to spend only after the payment of taxes.

• DPI = Personal income – Personal Direct taxes.

Disposable Personal Outlay• The disposable personal income may be spent fully or

individuals may save. What remains after saving is called the personal outlay. Disposable income is equal to consumption and savings.

• Disposable outlay = Disposable income – Savings.

Methods of Measuring national income

• The national income of a country can be measured in three alternative ways

• Census of production method• As a flow of income, and• As a flow of expenditure

Product Method• This method is popular in U.S.A. and is called as Total Product

method or Goods Flow Method. In India, It is known as inventory or Product method.

• In this method, the economy is classified in to three transaction sector like industrial, services and foreign transaction sector where international payments are considered.

• We calculate the money value of all final goods and services produced in an economy during a year. The money value of these goods and services is calculated at market price. The sum-total is called the GDP at market price

Income Method• We estimate the income earned by various factor

services engaged in the process of production. The sum of these incomes provides us the measure of gross national income at factor cost.

• GNP = wages and salaries + rent +interest + Dividends + undistributed corporate profits + mixed incomes + direct taxes + indirect taxes + depreciation + net income from abroad.

Expenditure method•Prof. Samuelson calls this as “ Flow of Product Approach”.

In India, it is known as Outlay method. GNP is the sum of expenditure incurred on goods and services during one year in a country.

•GNP = C + I + G + (x – M) • Gross Private Consumption Expenditures(C)• Gross Private Investment (I) • Government Purchases (G) • Net Exports (X - M)

•We sum up the flow of expenditure in an economy to arrive at national income estimates, If we add the value of expenditure on all these items we get the value of gross national expenditure at market prices.

Trends in India’s national income growth and structure

• Trend in NNP: The real national income of India has increased at an annual average rate of 4.4% during the 55 years of economic planning. If we consider the last 14 years we find that the rate of increase in the national income has been around 6% per annum.

• During the tenth five year plan they set up the target of 8% growth rate but achieved at 7.6%, this encouraged the eleventh planners to set a target of 8.5% per annum growth rate. Growth rate achieved is 8%.

Importance of National Income Analysis

• They provide as an index of economic activity and an instrument of economic planning.

• National income accounting indicates the growth of the economy in terms of income and output.

• National income statistics help the policy makers to frame policies to achieve full employment and rapid economic growth.

• A complete knowledge about the trends in national income is essential in economic planning.

Balance Of Payment (BOP)

Introduction• Balance of payments (BOP) accounts are an accounting

record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods & services, financial capital, and financial transfers.

A country has to deal with other countries in respect of 3 items:-• Visible items which include all types of physical goods

exported and imported.• Invisible items which include all those services whose export

and import are not visible. e.g. transport services, medical services etc.

• Capital transfers which are concerned with capital receipts and capital payment.

Definition-

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

Features• It is a systematic record of all economic transactions between

one country and the rest of the world.• It includes all transactions, visible as well as invisible.• It relates to a period of time. Generally, it is an annual

statement.• It adopts a double-entry book-keeping system. It has two

sides: credit side and debit side. Receipts are recorded on the credit side and payments on the debit side.

Components of BOP1. Current Account Balance• BOP on current account is a statement of actual

receipts and payments in short period.

• It includes the value of export and imports of both visible and invisible goods. There can be either surplus or deficit in current account.

• The current account includes:- export & import of services, interests, profits, dividends and unilateral receipts/payments from/to abroad.

2. Capital Account Balance• It is difference between the receipts and payments on

account of capital account. It refers to all financial transactions.

• The capital account involves inflows and outflows relating to investments, short term borrowings/lending, and medium term to long term borrowing/lending.

• There can be surplus or deficit in capital account.

• It includes: - private foreign loan flow, movement in banking capital, official capital transactions, reserves, gold movement etc.

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

Causes of Disequilibrium

1. Natural causes – e.g. floods, earthquake etc.2. Economic causes – e.g. Cyclical Fluctuations, Inflation,

Demonstration Effect etc.3. Political causes – e.g. international relation, political

instability, etc.4. Social factors – e.g. change in taste and preferences etc.

How to correct the Balance of Payment?

1. Monetary measures – • Deflation - Deflation means falling prices. Deflation has been

used as a measure to correct deficit disequilibrium. A country faces deficit when its imports exceeds exports.

• Deflation is brought through monetary measures like bank rate policy, open market operations, etc. or through fiscal measures like higher taxation, reduction in public expenditure, etc.

• Deflation would make our items cheaper in foreign market resulting a rise in our exports. At the same time the demands for imports fall due to higher taxation and reduced income.

• This would build a favourable atmosphere in the balance of payment position. However Deflation can be successful when the exchange rate remains fixed.

• Exchange Depreciation - Exchange depreciation means decline in the rate of exchange of domestic currency in terms of foreign currency. This device implies that a country has adopted a flexible exchange rate policy.

• Suppose the rate of exchange between Indian rupee and US dollar is $1 = Rs. 40. If India experiences an adverse balance of payments with regard to U.S.A, the Indian demand for US dollar will rise.

• The price of dollar in terms of rupee will rise. Hence, dollar will appreciate in external value and rupee will depreciate in external value. The new rate of exchange may be say $1 = Rs. 50. This means 25% exchange depreciation of the Indian currency.

• Exchange depreciation will stimulate exports and reduce imports because exports will become cheaper and imports costlier. Hence, a favourable balance of payments would emerge to pay off the deficit.

• Devaluation - Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of home currency against foreign currency.

• When devaluation is effected, the value of home currency goes down against foreign currency, Let us suppose the exchange rate remains $1 = Rs. 10 before devaluation. Let us suppose, devaluation takes place which reduces the value of home currency and now the exchange rate becomes $1 = Rs. 20.

• After such a change our goods becomes cheap in foreign market. This is because, after devaluation, dollar is exchanged for more Indian currencies which push up the demand for exports. At the same time, imports become costlier as Indians have to pay more currencies to obtain one dollar. Thus demand for imports is reduced.

• Generally devaluation is resorted to where there is serious adverse balance of payment problem.

2. Non-Monetary Measures –• Export Promotion – • The government can adopt export promotion measures to

correct disequilibrium in the balance of payments. This includes substitutes, tax concessions to exporters, marketing facilities, credit and incentives to exporters, etc.

• The government may also help to promote export through exhibition, trade fairs; conducting marketing research & by providing the required administrative and diplomatic help to tap the potential markets

• Quotas – • Under the quota system, the government may fix and

permit the maximum quantity or value of a commodity to be imported during a given period. By restricting imports through the quota system, the deficit is reduced and the balance of payments position is improved.

• Tariffs – • Tariffs are duties (taxes) imposed on imports. When tariffs

are imposed, the prices of imports would increase to the extent of tariff. The increased prices will reduced the demand for imported goods and at the same time induce domestic producers to produce more of import substitutes. Non-essential imports can be drastically reduced by imposing a very high rate of tariff.

How to correct the Balance of Payment?

1. Monetary measures – • Deflation• Exchange Depreciation• Devaluation2. Non-Monetary Measures –• Export Promotion• Quotas• Tariffs

Balance of Trade

• The difference between a country's imports and its exports. Balance of trade is the largest component of a country's balance of payments.

• Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad.

• Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

• When exports are greater than imports than the BOT is favourable and if imports are greater than exports then it is unfavourable

BOP vs. BOT

• BOP1. It is a broad term.2. It includes all transactions

related to visible, invisible and capital transfers.

3. It is always balances itself.4. BOP = Current Account + Capital

Account + or - Balancing item ( Errors and omissions)

5. Following are main factors which affect BOPa) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT

• BOT1. It is a narrow term.2. It includes only visible items.

3. It can be favourable or unfavourable.4. BOT = Net Earning on

Export - Net payment for imports.

5. Following are main factors which affect BOTa) cost of productionb) availability of raw materialsc) Exchange rated) Prices of goods manufactured at home

UNEMPLOYMENT

• Every 6th person in the world is an Indian and every 3rd poor person in the world is also an Indian.

• With Increase in the number of unemployed persons, Poverty expands.

• The problems of unemployment and poverty is Very High which demands an immediate solution.

• Till 5th Five Year Plan, no serious efforts were taken to solve the unemployment problem.

• It was assumed that the gains of economic growth would percolate downwards and the inequalities would decline and problems of poverty and unemployment would get solved automatically.

Introduction to Unemployment

• But after the Fifth Five Year Plan, removal of unemployment became as one of the important Objectives of economic planning in all five year plans.

• In less developed countries economic growth generally benefits the elite groups and, as a result, economic Inequality grow.

• India is facing the same problem of Inequalities.

Cont:-

What is Unemployment?

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

Forms of Unemployment

Voluntary Unemploy

ment

Frictional Unemploy

ment

Casual unemploy

ment

Seasonal unemploy

ment

Structural Unemplo

yment

Technological

unemployment

Cyclical unemploy

ment

Disguised unemploy

ment

Chronic unemploy

ment

Voluntary Unemployment

• There are some people who are unwilling work at the

prevailing wage rate, or

• There are some people who get a continuous flow income

from their property or other sources and need not work.

Voluntary Unemployment is a National waste of human energy.

Frictional Unemployment

• Temporary phenomenon.

• Results when some workers are temporarily out of work while changing jobs.

• Also result when the work is suspended due to strikes or lockouts.

• Frictional unemployment is caused by imperfect mobility of labour.

Casual Unemployment

• Here workers are employed on a day to day basis.

• In generally exist in Construction, catering or agriculture industries.

• It occurs due to short-term contracts, which are terminable any time.

Chronic Unemployment

• When unemployment tends to be a long- term feature of a country it is called chronic unemployment.

• Underdeveloped countries suffer from chronic unemployment on account of :-– vicious circle of poverty– lack of developed resources and their under utilization– high population growth– backward & even primitive state of technology– low capital formation, etc.

Seasonal Unemployment

• Industries such as agriculture, the catering trade, trade in holiday resorts, some agro-based activities like sugar mills and rice mills, provide jobs of seasonal nature which are for certain period.

• People engaged in such type of work or activities may remain unemployed during the off-season.

• So it is Seasonal Unemployment.

Disguised Unemployment

• When some workers have zero marginal productivity so that their removal will not affect the volume of total output.

• Disguised unemployment implies underemployment of labour.

• This kind of unemployment is a common feature of under developed economies especially of their rural sector.

• In short, overcrowding in an occupation leads to disguised unemployment.

• Suppose, a family farm is properly organized

and 4 persons are working on it. If, however, 2

more workers are employed on it and there is

no change in output, we may say that these 2

workers are Disguisedly Unemployed.

Cont:-

Structural Unemployment

• Due to structural changes in the economy, Structural Unemployment may result.

• Caused by:- 1)decline in demand, 2)disinvestment, 3)reduction in its manpower requirement.

• In fact, structural unemployment is a natural concomitant of economic progress and innovation in a complex industrial economy of modern times.

Cyclical Unemployment• Capitalist biased, advanced countries are subject to trade

cycles.

• Trade cycles are especially recessionary and depressionary phases causing cyclical unemployment in these countries.

• During the contraction phase of a trade cycle in an economy, aggregate demand falls and this leads to disinvestment, decline in production and rise in unemployment.

The solution for cyclical unemployment lies in measures for increasing total expenditure in the economy, thereby pushing up the level of effective demand. Easy policy and fiscal measures such as Deficit Financing may help.

Technological Unemployment

Due to the introduction of new machinery, improvement

in methods of production, labour-saving devices, etc.,

some workers tend to be replaced by machines.

Their unemployment is termed as technological

unemployment.

Nature of Unemployment in INDIA

Unemployment

Urban

Industrial Unemploy

ment

Educated Unemploy

ment

Rural

Seasonal Unemploy

ment

Disguised Unemploy

ment

Most of the unemployment in India is definitely structural, that is, the structure of the economy is such that it does not absorb an increasing number of people coming to labour market in search of jobs.

Industrial Unemployment results when industrial sector fails to absorb the increasing labour force.

Also, Cyclical Unemployment is the result of Industrial Recession in urban areas.

Educated Unemployment results when a large number of educated people remain unabsorbed.

It is estimated that over 1/3rd of India's work force is Disguisedly Unemployed.

Cont:-

• Usual Status: This measure estimates the number of persons who may be said to be chronically unemployed. This measure generally gives the lowest estimate of unemployment especially for a poor economy because only a few can afford to remain without work over a long period.

• Current Weekly Status (CWS): This estimate reduces the reference period i.e. the period for which data is collected to one week. According to this estimate a person is said to be employed for the week even if he is employed only for a day during that week.

• Current Daily Status (CDS): The reference period here is a day. It counts every half day's activity status of the respondent over the week.

Ways to measure Unemployment

Causes of Unemployment

• Jobless Growth.

• Increase in Labour Force.

• Inappropriate Technology.

• Inappropriate Educational System.

Poverty In India

What is Poverty?

• Poverty is hunger.

• Poverty is lack of shelter.

• Poverty is being sick and not being able to see a doctor.

• Poverty is not having access to school and not knowing how to read.

• Poverty is not having a job, is fear for the future, living one day at a time.

• Poverty is losing a child to illness brought about by unclean water.

• Poverty is powerlessness, lack of representation and freedom.

Effects on Children• According to UNICEF, 22,000 children die each day due to poverty.

• Around 27-28 % of all children in developing countries are estimated to

be underweight or stunted.

• For the 1.9 billion children from the developing world, there are:

– 640 million without adequate shelter (1 in 3)

– 400 million with no access to safe water (1 in 5)

– 270 million with no access to health services (1 in 7)

• Worldwide,

– 10.6 million died in 2003 before they reached the age of 5 (same as

children population in France, Germany, Greece and Italy)

Effects on Women• Women make up half of the world's population and yet represent a

staggering 70% of the world's poor.

• Of the 500,000 women who die in childbirth every year, 99% live in

developing countries. In other words, in developing countries, a girl or a

woman dies every minute in giving birth.

Improper Sanitation

• Of the around six billion people in the world, at least 1.2 billion do not

have access to safe drinking water

• More than 2.4 billion people do not have proper sanitation facilities, and

more than 2,2 million people die each year from diseases caused by

polluted water and filthy sanitation conditions.

Effects on Education

• Based on enrollment data, about 72 million children of

primary school age in the developing world were not in school

in 2005; 57 per cent of them were girls. And these are

regarded as optimistic numbers.

• Nearly a billion people entered the 21st century unable to read

a book or sign their names.

• 121 million out of education worldwide.

Poverty in India

• Despite the growth and development of the Indian economy during the last couple

of decades, poverty is, parallel, increasing in absolute terms.

• The bare fact is that nearly 27.5 % of India’s population still lives below the

poverty line, and 75 % of this, lives in rural areas.

• A recent report laments that 77 % of Indians live on a daily income of Rs.20 only.

(Rural)

• About two thirds of India’s more than 1 billion people live in rural areas, and

almost 170 million of them are poor.

• Although many rural people are migrating to cities, 3 out of 4 of India’s poor

people live in the vast rural parts of the country.

• Poverty is deepest among scheduled castes and tribes in the country’s rural areas.

India’s poorest people include 50 % of members of scheduled tribes and 40 % of

people in scheduled castes.

• On the map of poverty in rural India, the poorest areas lie in parts of Rajasthan,

Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, Orissa and West

Bengal.

• In these areas shortages of water and recurrent droughts impede the transformation

of agriculture that the Green Revolution has achieved elsewhere.

Causes of Rural Poverty

Rapid Population Growth

• With 1,250,000,000 (1.25 billion) people, India is currently the world's

second largest country.

• From the total population of India 68.84% people live in rural area of

India and are growing very fast if we see the statistics of past few

decades.

Lack of Capital

• People basically depend on farming and agriculture in the rural areas

but due to lack of sufficient capital they are not able to do their farming

activities and earn, so they become poor and go below poverty line.

Lack of literacy• Many children living in rural areas receive a level of education which is very poor.

Overall enrollment in primary and middle schools are very low.

• 50 % of children living in these areas leave school before the fifth grade.

• These children leave school for variety of reasons: some leave because of lack of

interest; most leave so that they can work in the fields, where the hours are long and

the pay is low.

• A large percent of the dropouts are females. Forced by their parents, most girls

perform chores and tend the family at home.

• These are some of the reasons why 60% of all females in India are illiterate, a figure

much higher than those of males. As these children grow into adults, many are still

illiterate by the age of forty

Large Families• Generally in rural areas there is large number of people living in one

family. This happens because of two reasons.

• First there is a lack of proper family planning in the rural areas among the

villagers, which increases the population.

• Secondly the people in the rural areas believe in living in one single

families rather than living in nuclear families. This increases the burden of

number of people to be fed in the house and also increases the expenses.

Lack of Alternate Employment Opportunities Other than Agriculture

• The villagers in the rural areas have no alternative solutions to earn their

livelihood accept farming as very few job opportunities are their in the

villages and even if there are any job opportunities except farming the

money available is not good.

Government’s Initiatives

For Employment

• Jawahar Gram Samriddhi Yojana (JGSY) (Formerly known as Jawahar Rozgar

Yojana)

• Training rural youth for self employment TRYSEM Scheme

• Sampurna Gramin Rozgar Yojana

• National Rural Employment Guarantee Scheme

For Family Planning

• Family Planning / Welfare Program for Population Control

For Farmers Insurance

• Group Life Insurance Scheme for Rural Areas

• Agriculture Income Insurance Scheme

For Housing

• Rural Housing Program

For Development

• Small Farmer Development Program (SFDP)

• Drought Area Development

• Pradhan Mantri Gramodaya Yojana (PMGY)

• Swarna Jayanti Gram Swarozgar Yojana

• Integrated Rural Development Program

(Urban)• As per the latest NSSO survey reports there are over 80

million poor people living in the cities and towns of India. The

Slum population is also increasing and as per TCPO estimates

2001; over 61.80 million people were living in slums.

• The bulk of the urban poor are living in extremely deprived

conditions with insufficient physical amenities like :

– Low-cost water supply,

– Improper sanitation,

– Bad Sewerage and drainage system,

– Very less social services relating to health care, nutrition, pre-school

and non-formal education.

• With over 575 million people, India will have 41% of its

population living in cities and towns by 2030 of its nearly 1

billion inhabitants, an estimated 260.3 million are below the

poverty line, of which 193.2 million are in the rural areas and

67.1 million are in urban areas.

• The poverty level is below 10% in states like Delhi, Goa, and

Punjab etc whereas it is below 50% in Bihar (43) and Orissa

(47). It is between 30-40% in Northeastern states of Assam,

Tripura, and Mehgalaya and in Southern states of TamilNadu

and Uttar Pradesh.

Causes of Urban Poverty

Slow job growth

• Increasing Urban population (currently around 38 crore)

• Severe competition.

• Those who use to get jobs or promotions easily now have to struggle more due to

the population hike in the cities.

Migration of Rural Youth towards Cities

• Majority of rural area depends on agriculture (which is highly dependant on rain

patterns)

• Inadequate rain fall and improper irrigation facilities these days.

• Low or no production of crops which leads to severe poverty among rural

population.

• Urban poverty also increases due to migration of people from rural areas to cities

Government’s Initiative

For Employment

• Nehru Rozgar Yojana (NRY)

• Self – Employment Program for the Urban Poor (SEPUP)

• Prime Minister’s Rozgar Yojana (Also implemented in rural areas)

• Swarna Jayanti Shahri Rozgar Yojana

• Self – Employment to the Educated Urban Youth (SEEUY) Program

For Housing

• Financial assistance for Constructing Houses

Other Programmes

• Urban Basic Services for the Poor (UBSP) Program

• Prime Minister’s Integrated Urban Poverty Eradication Program

(PMIUPEP)

Inflation

Meaning of inflation

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

Definitions of inflation

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

• According to Prof. Samuelson “inflation occurs when general level of prices & cost are rising”.

Causes of Inflation• Two Shifts

– An increase in demand ( a shift in the demand curve to the right)

– A decrease in supply (a shift of the supply curve to the left)

Quantity

Price

($)S

D

Qe

Pe

D1

Q1

P1

Quantity

Price

($)S

Qe

Pe

D

S1

Q1

P1

Causes of Inflation• Any inflation that results from an increase in

demand is called demand-pull inflation• This is commonly described as "too much

money chasing too few goods"

• Caused by– Increased Incomes– Decreased income taxes– Increased optimism about the future– Decreased tendency to save– Consumers expect prices to rise in the future– More money in the economy

Demand Pull Factors• Mounting Govt. Expenditure

– Govt. expenditure steadily and continuously increasing over the years.

– Total expenditure (Both central and state govt.) increased from Rs. 740 crore (1950-51) to nearly Rs. 6,55,850 crore (2000-01).

– India is predominantly agricultural economy, therefore big programs of economic development involves huge investment.

– Annual rate of investment is increased (Rs. 1000 crores in 1950’s to Rs. 30,000 crores during 10th five year plan in 2002-07).

– Mounting govt. expenditure implies a growing public demand for goods and services and consequently it will result in rise in prices.

Contd..

• Deficit Financing and Increase in Money Supply– While revenue deficit has been rising in recent years,

fiscal deficit has been rising at a much faster rate.– Method of financing the fiscal deficit- through

borrowing from the market at higher rates.– An important factor of any spectacular rise in prices

is the expansion in money supply.– Without monetary expansion, inflation cannot be

sustained n all for any length of time.

Contd..• Role of Black Money

– There is a large accumulation of unaccounted money in the hands of income tax evaders, smugglers, builders, corrupt politicians and corrupt govt. servants.

– It is estimated that Rs. 6,00,000 crore of black money was there in 1997-98.

– Some reports claim a total exceeding US$12.4 trillion are stashed in Switzerland as of now.

• Uncontrolled growth in population– For the persistent gap between demand and supply, is due to

continually rising population.– In almost all goods and services, due to the rise in population, it

exerts continuous pressure on prices.

Causes of inflation• Any inflation that results from a decrease in supply is called cost-push inflation.• Cost-push inflation basically means that prices

have been "pushed up" by increases in costs of any of the four factors of production (labour, capital, land or entrepreneurship).

Caused by– Increased costs of raw materials– Increased Wages– Failure to replace capital goods as they age, reducing its

productivity, or increasing its maintenance costs– Falling Productivity of workers

Cost Push Factors

• Fluctuations in output and supply– The production of food grains was 89 million tonnes in 1964-

65, declined sharply to 72 million in 1965-66 (20% decrease).– In fiscal year ending June 2011, with a normal monsoon

season, Indian agriculture accomplished an all-time record production of 85.9 million tonnes of wheat, a 6.4% increase from a year earlier. Rice output in India also hit a new record at 95.3 million tonnes, a 7% increase from the year earlier.

– With decrease in production in output of food grains, prices will increase.

(Area in million hectares and production in million tonnes)

Crops

Sowing October 10 Production Percentage Change

Normal Full

Season2013 2014 2013-14 2014-15*

Sowing 2014 (col 4/col 3)

Production 2014-15 (col 6/col

5)

1 2 3 4 5 6 7 8Foodgrains 70.6 68.2 66.5 128.7 123.8 -2.5 -3.8

Rice 39.1 37.6 38 91.5 89.6 1.1 -2.1Coarse Cereals 20.8 19.6 18.2 31.2 28.7 -7.1 -8.0

Maize 7.2 8.2 7.8 17.1 16.5 -4.9 -3.5Pulses 10.8 10.9 10.2 6 5.5 -6.4 -8.3

Tur 3.8 3.9 3.6 3.2 2.8 -7.7 -12.5Urad 2.3 2.4 2.5 1.2 1.2 4.2 0.0

Oilseeds 18.3 19.5 17.8 22.6 20.1 -8.7 -11.1Groundnut 4.6 4.3 3.7 8.1 5.6 -14 -30.9Soyabean 10 12.2 11 11.9 11.6 -9.8 -2.5Sugarcane 4.7 5 4.9 352.1 355 -2 0.8

Cotton# 11 11.4 12.7 35.9 35.2 11.4 -1.9Jute & Mesta## 0.9 0.8 0.8 11.7 11.5 0 -1.7

All Crops 105.5 105.0 102.7 - - -2.2 -

#: Million bales of 170 kgs each. ##: Million bales of 180 kgs each. -: Not Available.*: Second Advance Estimates.

Source: Ministry of Agriculture, GoI.

Contd..• Taxation as a factor in rising costs

– Cost push factors consist mainly rise in wages, profit margins etc. – With every budget govt. impose fresh taxes, both direct and

indirect.– With increased indirect tax, traders have the opportunity to raise

prices.• Hike in oil prices and global inflation

– There are some serious inflationary pressures when oil prices increases.

– Due to unrest, wars and OPEC regulations, prices of crude oil changes.

– The current prices are very low ($45.54) therefore it is helping to curb inflation.

– In Oct. 2014, crude oil prices was more than $94 per barrel

Consequences of Inflation• Adverse effect on production

– Inflation led to recession in the Indian economy.– With increased prices, demand of goods decline.– When demand decline, production will decline.

• Adverse effect on distribution of Income– Producers, traders and speculators have gained enormously

through ever rising prices (profit margins) and illegal gains due to black marketeering.

– People living in past savings, pensioners etc. have been ruined due to continuous depreciation of purchasing power of a rupee.

Human Development

Introduction :• The emphasis on growth was based on the assumption that its

benefits will automatically “trickle down” to poor and marginalized people.

• The global HDR has created and developed four main composite human development indices to assess measurable dimensions of human development.

1. Human development index (HDI),2. The human poverty index (HPI), 3. The gender-related development index (GDI) and4. The gender empowerment measure (GEM)

Indicators of economic development

Origin of HDI:

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

Human development index

167

What is HDI ???• The HDI combines normalized measures of life

expectancy, literacy, educational attainment, and GDP per capita for countries worldwide.

• It is claimed as a standard means of measuring human development—a concept that, according to the United Nations Development Program (UNDP), refers to the process of widening the options of persons, giving them greater opportunities for education, health care, income, employment, etc.

• The basic use of HDI is to measure a country's development.

168

The HDI combines three basic dimensions

• Life expectancy at birth, as an index of population health and longevity.

• Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting).

• Standard of living, as measured by the natural logarithm of gross domestic product (GDP) per capita at purchasing power parity (PPP) in United States dollars.

Calculation of HDI

To construct the index, fixed minimum and maximum values have been established for each of these indicators:

• Life expectancy at birth: 25 years and 85 years• Adult literacy rate: 0 & 100 %• Combined gross enrolment ratio: 0% & 100 %• Real GDP per capita (PPP$): $100 & $40,000

(PPP$)

• Individual indices can be computed according to the general formula:

• Index = Actual xi value – minimum xi value/ Maximum xi value – minimum xi value

For eg: the life expectancy at birth in a country is 63.7 years the index of life expectancy for the country would be:Life expectancy index = 63.7-25/85-25 = 40/60 = 0.645

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

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

Limitations of HDI: Not a comprehensive measure of human development. It only

focuses on three dimensions of capabilities. The HDI is not designed to assess progress in human

development over a short-term period because two of its component indicators—adult literacy and life expectancy at birth—are not responsive to short-term policy changes.

Like any average country measure, the HDI does not account for variations in human development within the country.

Countries with the same HDI may be very different in how human development is distributed, either from region to region, or from social group to social group.

Rural Development

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

RURAL COMMUNITY

A group of people with a common characteristic or interest living together, in a village.

A Rural Community can be classified as rural based on the criteria of lower population density, less social differentiation, less social and spatial mobility, slow rate of social change, etc. Agriculture is the major occupation of rural people.

MAIN FEATURES OF RURAL COMMUNITY

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

LIFE OF RURAL PEOPLE

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

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

The United Nations defines Rural Development as:

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

DEV. IN RURAL AREA CAN BRING

INFA-STRUCTURE

TECHNOLOGY

HEALTHEDUCATION

ECONOMY

OBJECTIVES OF RURAL DEV.

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

Main Objectives

PROBLEMS IN RURAL DEVELOPMENT

1. People related2. Agricultural related problems3. Infrastructure related problems4. Economic problems5. Social and Cultural problems6. Leadership related problems7. Administrative problems

PEOPLE RELATED PROBLEMS

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

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

INFASTRUCTRAL RELATED PROB.

Poor infrastructure facilities like-: 1. Water2. Electricity 3. Transport 4. Educational institutions 5. Communication6. Health7. Employment8. Storage facility etc.

ECONOMIC PROBLEMS1. Unfavourable economic condition to adopt high cost technology.2. High cost of inputs.3. Under privileged rural industries

LEADERSHIP RELATED PROBLEM1. Leadership among the hands of inactive and incompetent

people.2. Self interest of leaders.3. Biased political will

ADMINISTRATIVE PROBLEMS1. Political interference.2. Lack of motivation and interest.3. Unwillingness to work in villages.4. Improper utilization of budget.5. No proper monitoring of programs. and lack in their implementation.

Importance of Rural Development

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

Rural development is needed because-:

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

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