Economy and Banking

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eCONOMY AND BANKING

Money

What Does Money Mean?
1. A commodity or asset, such as gold, an officially issued currency, coin or paper note, that can be legally exchanged for something equivalent, such as goods or services.

2. As defined by common law: a medium of exchange that is authorized or adopted by a domestic or foreign government and includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more nations.
Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.[1][2] The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.[3][4]
MONEY SUPPLY
Money supply is a way to measure currency in circulation. Its growth rate relative to inflation and GDP can indicate monetary inflation or deflation. According to the Austrian school of economics inflation is a result of a strongly rising monetary base as this process creates more money than the expansion of the economy would require.
Money Supply Definitions
Money supply is divided into different categories according to the size and maturity of deposits. There is no single international convention defining monetary aggregates from M0 to M4 which vary between countries. Empirical evidence has shown a strong correlation between the growth of money in circulation and rising prices.
WHAT IS MONETARY POLICY
Monetary policy refer to steps taken by RBI to regulate cost and supply of money in order to achieve certain socio Economic objective like price stabilization full employment, exchange regulation and increased economic growth. 
What Does Broad Money Mean?

In economics, broad money refers to the most inclusive definition of the money supply. Since cash can be exchanged for many different financial instruments and placed in various restricted accounts, it is not a simple task for economists to define how much money is currently in the economy. Therefore, the money supply is measured in many different ways. Broad money is used colloquially to refer to a broad definition of the money supply, which includes cash, money instruments, deposit account with banks etc.
Investopedia explains Broad Money. the most common measures of the money supply are termed M0, M1, M2 and M3. These measurements vary according to the liquidity of the accounts included. M0 includes only the most liquid instruments, and is therefore narrowest definition of money. M3 includes includes liquid instruments as well as some less liquid instruments and is therefore considered the broadest measurement of money.    

Narrow Money

What Does Narrow Money Mean?
A category of money supply that includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. In the United States narrow money is classified as M1 (M0 + demand accounts), while in the U.K. M0 is referenced as narrow money.
Investopedia explains Narrow Money
The name comes from the fact that M1/M0 are the narrowest or most restrictive ideas of money that are the basis for the medium of exchange within the economy. This category of money is considered to be the most readily available for transactions and commerce.

India

*                   Reserve Money (M0): Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.
*                   M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI).
*                   M2: M1 + Savings deposits with Post office savings banks.
*                   M3: M1+ Time deposits with the banking system. = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).
*                   M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).
As defined by the Reserve Bank of India (RBI.)

RECESSION

In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time.[1][2] During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise.
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s.[1] It was the longest, most widespread, and deepest depression of the 20th century, and is used in the 21st century as an example of how far the world's economy can decline.[2] The depression originated in the U.S., starting with the stock market crash of October 29, 1929 (known as Black Tuesday), but quickly spread to almost every country in the world.[1]
The Great Depression had devastating effects in virtually every country, rich and poor. Personal income, tax revenue, profits and prices dropped, and international trade plunged by ½ to ⅔. Unemployment in the U.S. rose to 25%, and in some countries rose as high as 33%.[3] Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60%.[4][5][6] Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as cash cropping, mining and logging suffered the most.[7]
Countries started to recover by the mid-1930s, but in many countries the negative effects of the Great Depression lasted until the start of World War II.[8] 
THE CURRENT FINANCIAL CRISIS The financial crisis of 2007 to the present is a crisis triggered by a liquidity shortfall in the United States banking system caused by the overvaluation of assets.[1] It has resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.[2] It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity.[3] Many causes have been suggested, with varying weight assigned by experts.[4] Both market-based and regulatory solutions have been implemented or are under consideration,[5] while significant risks remain for the world economy over the 2010–2011 periods.[6]
The collapse of a global housing bubble, which peaked in the U.S. in 2006, caused the values of securities tied to real estate pricing to plummet thereafter, damaging financial institutions globally.[7] Questions regarding bank solvency, declines in credit availability, and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during late 2008 and early 2009. Economies worldwide slowed during this period as credit tightened and international trade declined.[8] Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st century financial markets.[9] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion, and institutional bailouts.
subprime lending
In finance, subprime lending (also referred to as near-prime, non-prime, and second-chance lending) means making loans that are in the riskiest category of consumer loans and are typically sold in a separate market from prime loans. The standards for determining risk categories refer to the size of the loan, "traditional" or "nontraditional" structure of the loan, borrower credit rating, ratio of borrower debt to income or assets, ratio of loan to value or collateral, and documentation provided on those loans which do not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages (are "non-conforming"). Although there is no single, standard definition, in the United States subprime loans are usually classified as those where the borrower has a FICO score below 640. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards. The term was popularized by the media during the "credit crunch" of 2007.
"Subprime" could also refer to a security for which a return above the "prime" rate is adhered, also known as C-paper. Subprime borrowers show data on their credit reports associated with higher default rates, including limited debt experience, excessive debt, a history of missed payments, failures to pay debts, and recorded bankruptcies. Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market

Economic Theories

Inflation, Deflation and Reflation

Inflation is a global phenomenon. There is hardly any country in the capitalist world, which is not afflicted by the spectre of inflation. Inflation is a sizeable and a rapid increase in the general price level. A small increase in the general price level is not regarded inflationary in strict economic sense. Moreover, inflation is not always bad. An increase in the general price levels in the midst of depression is not inflationary, as it doesn�t have any harmful consequences for the economy. Thus, inflation is the state of disequilibria in which an expansion of purchasing power tends to cause or is the effect of an increase of the price level.

There are two approaches to the theory of inflation, namely,
  • The Quantity Theory of Money Approach, and
  • The Excess Demand Approach

The Quantity theory of money approach suggests that it is the increase in the quantity of money that causes an inflationary rise in the price level. The Excess demand approach, on the other hand, suggests that inflation is a situation in which the total demand for goods exceeds the total supply of goods.

Deflation is the opposite of Inflation. Deflation is a state of disequilibria in which a contraction of purchasing power tends to cause, or is the effect of, a decline of the price level. It must be noted here that Deflation is different from Disinflation. Disinflation may be defined as the process of reversing inflation without creating unemployment or reducing the output in the economy. In fact, disinflation is a deliberate attempt to counter a highly inflationary situation.

Reflation may be defined as �inflation deliberately undertaken to relieve a depression�. In other words, reflation is a type of controlled inflation. When deflation is carried to an extreme limit and the prices of goods and services fall to extremely low levels, then the government may resort to reflation to protect the economy of the country from serious consequences.

stagflation, hyper-inflation

• STAGFLATION

What Does Stagflation Mean?
A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.

Investopedia explains Stagflation
Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.


• HYPERINFLATION

What Does Hyperinflation Mean?
Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.

Investopedia explains Hyperinflation
When associated with depressions, hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked this causes prices to increase, as the currency loses its value.

When associated with wars, hyperinflation often occurs when there is a loss of confidence in a currency's ability to maintain its value in the aftermath. Because of this, sellers demand a risk premium to accept the currency, and they do this by raising their prices.

One of the most famous examples of hyperinflation occurred in Germany between January 1922 and November 1923. By some estimates, the average price level increased by a factor of 20 billion, doubling every 28 hours.


• REFLATION

What Does Reflation Mean?
A fiscal or monetary policy, designed to expand a country's output and curb the effects of deflation. Reflation policies can include reducing taxes, changing the money supply and lowering interest rates.

The term "reflation" is also used to describe the first phase of economic recovery after a period of contraction.

Investopedia explains Reflation
Reflation policy has been used by American governments, to try and restart failed business expansions since the early 1600s. Although almost every government tries in some form or another to avoid the collapse of an economy after a recent boom, none have ever succeeded in being able to avoid the contraction phase of the business cycle. Many academics actually believe government agitation only delays the recovery and worsens the effects.


• DISINFLATION

What Does Disinflation Mean?
A slowing in the rate of price inflation. Disinflation is used to describe instances when the inflation rate has reduced marginally over the short term. Although it is used to describe periods of slowing inflation, disinflation should not be confused with deflation.

Investopedia explains Disinflation
Disinflation is commonly used by the Federal Reserve to describe situations of slowing inflation. Instances of disinflation are not uncommon and are viewed as normal during healthy economic times. Although sometimes confused with deflation, disinflation is not considered to be as problematic because prices do not actually drop and disinflation does not usually signal the onset of a slowing economy. types of inflation - September 14th, 2008

ACCORDING TO THE RATE OF INFLATION.

1. Moderate, Gal1oping and Hyperinflation
The severity of inflation is often measured in terms of the rapidity of price rise. On the basis, a quantitative distinction of inflation may be nude into three categories, viz: Moderate inflation; Running and galloping inflation; and Hyperinflation.

a. Moderate Inflation
It is a mild and tolerable form of inflation. It occurs when prices are rising slowly When the rate of inflation is less than 10 per cent annually, or it is a single digit int1ation rate, it is considered to be a moderate inflation in the present the economy.
Prof. Samuelson observes that moderate inflation is typical today in most industrialized countries. The following are the major characteristics of moderate inflation:
i. There is a single digit inflation rate (less than 10 per cent) annually.
ii. It does not disrupt the economic balance.
iii. It is regarded as stable Inflation in which the relative prices do not get far out of line.
iv. People’s expectations remain more or less stable under moderate inflation
v. Under a low inflation rate, the real interest rate is not too low or negative, so money can serve its role as a store of value without difficulty.
vi. There are modest inefficiencies associated with moderate inflation.

Economists have arbitrarily laid down that a 3-4 per cent price rise per annum is a tolerable rate of inflation in modern economies. Even the Chakravarthi Report of the Reserve Bank of India has accepted 3-4 per cent rate of inflation annually to be an efficient and tolerable norm for the Indian economy. Incidentally, some economists have described up to 3 per cent annual rate of inflation as ‘creeping inflation’ and if it exceeds 10 per cent, it is called ‘walking inflation.’ This means, Samuelson has clubbed ‘creeping’ and ‘walking’ inflation into ‘moderate’ inflation. Samuelson’s opinion, moderate inflation is not a serious problem. While some economists feel that even a walking inflation should make us more cautious, as it represents a warning signal for the occurrence of running or double digit and eventually a galloping inflation, if it is not checked in time.

b. Running and Galloping Inflation
When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 per cent rise in prices over a decade. Thus, when prices rise by more than 10 per cent a year, running inflation occurs. Economists have not described the range of running inflation. But, we may say that a double digit inflation of 10-20 per cent per annum is a running inflation. If it exceeds that figure, it may be called ‘galloping’ inflation. According to Samuelson, when prices are rising at double or triple digit rates of 20, 100 or 200 per cent a year, the situation is described as ‘galloping’ inflation. Indian economy has witnessed a sort of ‘running’ and ‘galloping’ inflation to some extent (not exceeding 25 per cent per annum) during the planning era, since the Second Plan period. Argentina, Brazil and Israel, for instance, have experienced inflation rates over 100 per cent in the eighties. Galloping inflation is really a serious problem. It causes economic distortions and disturbances.


c. Hyperinflation
In the case of hyperinflation, prices rise every movement, and there is no limit to the height to which prices might rise. Therefore, it is difficult to measure its magnitude, as prices ris~ by fits and starts. . In quantitative terms, when prices rise over 1000 per cent in a year, it is called a hyperinflation. Austria, Hungary, Germany, Poland and Russia witnessed hyperinflation in the wake of World War I. Hyperinflation notably took place in Germany in 1920-1923. The German price index rose from 1 to 10,00,000,000 during
January 1922 to November 1923. Believe it or not, it is a fact!
The Main Features of Hyperinflation are
I. During hyperinflation, the price rise is severe. The price index moves up by leaps and bounds. It is over 1000 per cent per year. There is at least a 50 per cent price rise in a month, so that in a year it rises to about 130 times.
ii. It represents the most pathetic deterioration in people’s purchasing power.
iii. It is apparently generated by a massive fiscal dislocation.
iv. It is amplified by wage-price spiral.
v. Hyperinflation is a monetary disease.
vi. The velocity of circulation of money increases very fast.
vii. The structure of the relative prices of goods become highly unstable.
viii. The real wages tend to decline fast.
ix. Inequalities increase.
x. Overall economic distortions take place.


ACCORDING TO THE NATURE OF THE TIME PERIOD OF OCCOURANCE.

2. War, Post-War and Peace-Time Inflation
On the basis of the nature of time-period of occurrence, we have:
• War-time inflation;
• Post-war inflation; and
• Peace-time inflation.

a. War-Time Inflation
It is the outcome of certain exigencies of war, on account of increased government expenditure on defense which is of an unproductive nature. By such public expenditure, the government apportions a substantial production of goods and services out of total availability for war which causes a downward shift in the supply; as a result, an inflationary gap may develop.

b. Post-war Inflation
It is a legacy of war. In the immediate post-war period, it is usually experienced. This may happen when the disposable income of the community increases, when war-time taxation is withdrawn or public debt is repaid in the post-war period.

c. Peace-time Inflation
By this is meant the rise in prices during the normal period of peace. Peacetime inflation is often a result of increased government outlays on capital projects having a long gestation period; so a gap between money income and real wage goods develops. In a planning era, thus, when government’s expenditure increases, prices may rise.


ACCORDING TO THE SCOPE AND COVERAGE.

3. Comprehensive and Sporadic Inflation
• From the coverage or scope point of view, we have:
• Comprehensive or economy-wide inflation, and
• sporadic inflation.

a. Comprehensive Inflation
When prices of every commodity throughout the economy rise, it is called economy-wide or comprehensive inflation. It is a normal inflationary phenomenon and refers to a rise in the General Price level

b. Sporadic Inflation
This is a kind of sectional inflation. It consists of cases in which the averages of a group of prices rise because of increases in individual prices due to abnormal shortage of specific goods. When the supplies of some goods become inelastic, at least temporarily, due to physical or structural constraints, sporadic inflation has its sway. For instance, during drought conditions when there is a failure of crops, food grain prices shoot up. Sporadic inflation is a situation in which direct price control, if skillfully used, is most likely to be beneficial to the community at large.


ACCORDING TO THE GOVERNMENT REACTION.

4. Open and Repressed Inflation
Inflation is open or repressed according to the government’s reaction to the prevalence of inflationary forces in the economy.

a. Open Inflation
When the government does not attempt to prevent a price rise, inflation is said to be open. Thus, inflation is open when prices rise without any interruption. In open inflation, the free market mechanism is permitted to fulfill its historic function of rationing the short supply of goods and distribute them according to consumer’s ability to pay. Therefore, the essential characteristics of an open inflation lie in the operation of the price mechanism as the sole distributing agent. The post-war hyperinflation during the twenties in Germany is a living Example of open inflation.

b. Repressed Inflation
When the government interrupts a price rise, there is a repressed or suppressed’ inflation. Thus, suppressed inflation refers to those conditions in which price increases are prevented at the present time through an adoption of certain measures like price controls and rationing by the government, but they rise on the removal of such controls and rationing. The essential characteristic of repressed inflation, in contrast to open inflation, is that the former seeks to prevent distribution through price rise under free market mechanism and substitutes instead a distribution system based on controls. Thus, the administration of controls is an important feature of suppressed Inflation . However, many economists like Milton and G.N.Halm opine that if there has to be any inflation, it is better open than suppressed. Suppressed inflation is condemned as it breeds number of evils like black market, hierarchy of price controllers and rationing officers, and uneconomic diversion of productive resources from essential industries to non-essential or less essential goods industries since there is a free price movement in the latter and hence are more profitable to investors.


ACCORDING TO THE CAUSE

a. Credit Inflation.
Inflation which is caused by excessive expansion of bank credit or money supply is referred to as credit or money inflation.

b. Deficit Inflation.
It is the inflation caused by deficit financing. When the government budgets contain heavy deficit financing, through creating new money, the purchasing power in the community increases and prices rise. This may be referred as to as deficit-induced inflation. During a planning era, when government launches upon heavy investment, it usually resorts to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when the production of consumption goods fails to keep pace with the increased money expenditure.

c. Scarcity Inflation.
Whenever scarcity of real goods occurs or may be artificially created by the hoarding activities of unscrupulous traders and speculators which may result into black-marketing, thereby causing prices to go up, such type of inflation may be described
as scarcity inflation.

d. Profit Inflation.
In his recent book, Growth less Inflation by Means of Stockless Money, Prof. Brahmananda profit inflation is a unique category of inflation. The concept of profit inflation was originated by Keynes in his Treatise on Money. According to Keynes, the price level of consumption goods is a function of the investment exceeding savings. He considered the investment boom as a reflection of profit boom. Inflation is unjust in its distribution effect. It redistributes income in favor of profiteers and against the wage-earning class. During inflation, thus, the entrepreneur class may tend to expect an upward shifting of the marginal efficiency of capital (MEC); hence, entrepreneurs are induced to invest more even by borrowing at higher interest rates. Eventually, investment exceeds savings and economy tends to reach a higher level of money income equilibrium. If economy is operating at full employment level or if there are bottlenecks of market imperfections, real output will not rise proportionately, so the imbalance between money income and real income is corrected through rising prices.

e. Foreign-Trade Induced Inflation.
For an international economy, we may categorize the following two types of inflation as being caused by factors pertaining to the balance of payments.
i. Export-Boom Inflation; and
ii. Import Price-hike Inflation.

i. Export-Boom Inflation.
When a country having a sizeable export component in its foreign trade experiences a sudden rise in the demand for its exportable against the inelastic supply of exportable in the domestic market, it obviously implies an excessive pressure of demand which is revealed in terms of persistent inflation at home. Again, trade gains and sudden influx of exchange remittances may lead to an increase in monetary liabilities which is further reflected in the rising pressure of demand for domestic output causing an inflationary spiral to get further momentum. Such a permanent case for export-boom inflation is, not however, ruled out in the Indian economy, because neither export trade is a significant portion of Domestic National Product nor is there a continuous boom of export-demand, causing tens of trade to move up favorably all the time.

ii. Import Price-hike Inflation.
When prices of import components rise due to inflation abroad, the domestic costs and prices of goods using these imported parts will tend to rise. Such inflation is referred to as imported inflation. For instance, hike in oil prices by the Arab countries was responsible for accelerating. Inflationary price rise in many oil-importing countries, including India to some extent.

j. Tax Inflation.
Year to year increase in commodity taxation such as excise duties and sales tax may lead to rise in prices of taxed goods. Such inflation is termed as tax inflation or tax-induced inflation.

g. Cost Inflation.
When inflation emerges on account of a rise in cost factor, it is called cost inflation. It occurs when money incomes (wage rate, particularly) expand more than real productivity. Cost inflation has its course through the level of money costs of the factors of production and in particular through the level of wage rates. Due to a rising cost of living index, workers demand high wages, and higher wages in their turn increase the cost of production, which a producer generally meets by raising prices. This process of spiraling may each higher and higher level. In this case, however, cyclical anti-inflation remedies of monetary controls are not relative effective. Wage inflation is an important variant of cost inflation. Wage push inflation occurs when money wages are raised without corresponding improvement in the productivity of the workers.

h. Demand Inflation.
When there is an excess of aggregate, demand against the available aggregate supply of goods and services, prices tend to rise. It is called demand-induced inflation. Population-growth, rising money income, etc. forces play a significant role in generating demand inflation.


ACCORDING TO THE SCHOOL OF THOUGHTS

Demand-Pull vs. Cost-Push Inflation
Broadly speaking, there are two schools of thought regarding the possible causes of inflation. One school views the demand-pull element as an important cause of inflation, while the other group of economists holds that inflation is mainly caused by the cost-push element.

a. Demand-Pull Inflation
According to the demand-pull theory, prices rise in response to an excess of aggregate demand over existing supply of goods and services. The demand-pull theorists point out that inflation (demand-pull) might be caused, in the first place, by an increase in the quantity of money, when the economy is operating at full employment level. As the quantity of money increases, the rate of interest will fall and, consequently, investment will increase. This increased investment expenditure will soon increase the income of the various factors of production. As a result, aggregate consumption expenditure will increase leading to an effective increase in the effective demand. With the economy already operating at the level of full employment, this will immediately raise prices, and inflationary forces may emerge. Thus, when the general monetary demand rises faster than the general supply, it pulls up prices (commodity prices as well as factor prices, in general). Demand-pull inflation, therefore, manifest itself when there is active cooperation, or passive collusion, or a failure to take counteracting measures by monetary authorities. Demand-pull or just demand inflation may be defined as a situation where the total monetary demand persistently exceeds total supply of real goods and services at current prices, so that prices are pulled upwards by the continuous upward shift of the aggregate demand function.

Causes of Demand-Pull Inflation
It should be noted that the concept of demand-pull inflation is associated with a situation of full employment where increase in aggregate demand cannot be met by a corresponding expansion in the supply of real output. There can be many reasons for such excess monetary demand:
1. Increase in Public Expenditure. There may be an increase in the public expenditure (G) in excess of public revenue. This might have been made possible (or rendered necessary) through public borrowings from banks or through deficit financing, which implies an increase in the money supply.
2. Increase in Investment. There may be an increase in the autonomous investment (iI in firms, which is in excess of the current savings in the economy. Hence, the flow of total expenditure tends to rise, causing an excess monetary demand, leading to an upward pressure on prices.
3. Increase in MPC. There may be an increase in the marginal propensity to consume (MPC), causing an excess monetary demand. This could be due to the operation of demonstration effect and such other reasons.
4. Increasing Exports and Surplus Balance of Payments. In an open economy, an increasing surplus in the balance of payments also leads to an excess demand. Increasing exports also have an inflationary impact because there is generation of money income in the home economy due to export earnings but, simultaneously, there is reduction in
the domestic supply of goods because products are exported. If an export surplus is not balanced by increased savings, or through taxation, domestic spending will be in excess of the value of domestic output, marketed at current prices.
5. Diversification of Goods. A diversion of resources from the consumption goods sector either to the capital goods sector or the military sector (for producing war goods) will lead to an inflationary pressure because while the generation of income and expenditure continues, the current flow of real—output decreases on account of high gestation period involved in these sectors. Again, the opportunity cost of war goods is quite high in terms of consumption goods meant for the civilian sector. This leads to an excessive monetary demand for the goods and services against their real supply, causing the prices to move up.
In short, it is said that the demand-pull inflation could be averted through deflationary measures adopted by the monetary and fiscal authorities. Thus, passive policies are responsible for demand-pull inflation.

b. Cost-Push Inflation
A group of economists hold the opposite view that the process of inflation is initiated not by an excess of general demand but by an increase in costs, as factors of production try to increase their share of the total product by raising their prices. Thus, it has been viewed that a rise in prices is initiated by growing factor costs. Therefore, such a price rise is termed as “cost-push” inflation as prices are being pushed up by the rising factor costs.
Cost-push inflation, or cost inflation, as it is sometimes called, is induced by the wage inflation process. It is believed that wages constitute nearly seventy per cent of the total cost of production. This is especially true for a country like India, where labour intensive techniques are commonly used. Thus, a rise in wages leads to a rise in the total cost of production and a consequent rise in the price level, because fundamentally, prices are based on costs. It has been said that a rise in wages causing a rise in prices may, in turn, generate an inflationary spiral because an increase would motivate the workers to demand higher wages. Indeed, any autonomous increase in costs, such .1S a rise in the prices of imported components or an increase in indirect taxes (excise duties, etc.), may initiate a cost-push inflation. Basically, however, it is wage-push pressures which tend to accelerate the rising price spiral.
Cost-push inflation may occur either due to wage-push or profit-push. Cost-push analysis assumes monopoly elements either in the labour market or in the product market. When there are monopolistic labour organizations, prices may rise due to wage-push. And, when there are monopolies in the product market, the monopolists may be induced to raise the prices. In order to fetch high profits. Then, there is profit-push in raising the prices. However, the cost-push hypothesis rarely considers autonomous attempts to increase profits as an important inflationary element. Firstly, because profits are generally a small fraction of the total price, a rise in profits would have only a slight impact on prices. Secondly, the monopolists generally hesitate to raise prices in absence of obvious demand-pull elements. Finally, the motivation for profit-push is weak since, at least in corporations, those who make the decision to raise prices are not the direct beneficiaries of the price increase. Hence cost-push is generally conceived as a synonymous with wage-push. When wages are pushed up, cost of production increases to a considerable extent so that prices may rise. Since wages are pushed up by the demand for high wages by the labor unions, wage-push may be .equated with union-push. According to one variant of the cost-push theory, sectoral shifts in demand are prime-movers in the inflationary process. Starting with an autonomous shift in demand, a rise in wages and prices could result in one sector and this rise could elicit further shifts of demand. This happens because there is a close link between different goods through inputs. One good serves as an input in the production of the other goods, and consequently, when the price of the input rises, the prices of output will also rise. For instance, when due to a rise in wages in the steel industry, price of steel may rise, and this will raise the prices of vehicles, machines, etc., using Steel as input. The rise in the prices of vehicles may in turn raise the cost of transport and manufactured goods. Similarly, prices of tractors, etc. may increase due to high prices of steel so that costs of agriculture may raise, hence food and raw material prices will also rise. All these ultimately raise the cost of living, leading to increase in wage rates. Thus, inflation once sets in motion due to the phenomenon of cost-push in one industry or sector spreads throughout the economy.

HOW INFLATION IS CALCULATED
Inflation indicates the rise in price of a basket of commodities on a point-to-point basis. It basically suggests an increase in the cost of living over a period of one year. For instance, you buy 10 essential commodities on January 1, 2004, for Rs 100. If the same set of 10 commodities costs Rs 105 on January 1, 2005, the inflation rate would be 5%. It would mean that the prices are rising at 5% per annum. The rate of inflation is high if the prices are rising by 7%-8% or more and low if the prices are rising at 2%-3%. A decline in prices results in deflation which is not good for the economy. Economists believe that moderate inflation is good for a growing economy as it provides incentives for growth.
What is the Wholesale Price Index (WPI)?
To calculate inflation, the inflation-computing agency collects the prices of identified commodities. The agency can take into account wholesale prices, retail prices or factory-gate prices. As wholesale markets are few in number, it is easier to collect the prices of goods traded there. The Wholesale Price Index (WPI) takes into account the wholesale prices of over 400 commodities.
The base year for the present WPI index, which is computed by the ministry of commerce and industry, is 1993-94. The 100-point index is subdivided into three groups. The primary articles, which include food and non-food agriculture products, have a weight of 22.02% in the index. Manufactured goods have the highest weight of 63.75%. Fuel and power account for 14.23%. The government is now ready with a revised index with a new base year.
Why does the WPI need revision?
The WPI must reflect the consumption pattern of people in order to truly reflect the price rise. To be effective, the basket of commodities whose prices are tracked... : must be relevant. For instance, not many people were using cellphones in 1993-94 but are using them extensively now. So their prices and those of mobile services have become important. An index that does not take into account the changing prices of mobile services won’t be relevant in today’s context.
Similarly, consumption patterns change with an increase in income. People spend more on clothes, recreation and holidays as incomes rise. But less amounts (as percentage of income)on food and other essential items.
The working group on WPI, headed by Planning Commission member Abhijit Sen, has worked out a new index. The base year of the new index will be upgraded to 2000-01. And the basket of commod-ities will be expanded to around 1,200 to reflect the post-liberalisation consumption pattern.
What is the Consumer Price Index (CPI)?
The CPI (industrial workers) is based on changes in prices at the retail level. The index, worked out by the ministry of labour, is used to measure the cost of living. CPI is used by the government, private sector, embassies, etc to compute the dearness allowance (DA). The government is also revising the CPI (IW). The base year will be upgraded to 2001 from 982. There is an index for urban non-manual employees (CPI-UNME) too for which the base year is 1984-85 and an index for agricultural labours (CPI-AL) with base year 1986-87. These indices serve different purposes.
What are the other inflation indices?
The working group on WPI is also working on the Service Price Index (SPI) and the Producer Price Index (PPI). The share of the service sector in the Gross Domestic Product (GDP) has gone up from about 28% in 1950 to over 50% now. Also, service tax has emerged as an important source of revenue for the exchequer. In view of the importance of this sector in national income, the working group has made a case for measuring changes in the prices of services.
As for PPI, it would reflect changes in the prices of manufactured items at the factory-gate. It will not consider taxes, trade margins and transport costs. The government ultimately proposes to replace the WPI with the PPI, which is considered an improvement over the former....

“The WPI price data collection completely excludes the service sector and the receipt of input on weekly prices in manufactured products is very low,” Mr Mukherjee said, responding to a question on the government’s price monitoring strategy.

The move, which will also change in the base year of the wholesale price index (WPI) series from 1993-94 to 2004-05, is aimed at tracking changes in price level accurately. Economists say India’s annual inflation figures, based on WPI, do not reflect the consumption pattern of the country’s household.

In India, the weekly WPI is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products. The government has plans to draw up a producers price index by modifying the present WPI, but work on that has been delayed due to problems in data collection.

“In the absence of legal backing for a dedicated data collection system, the data is received on a voluntary basis from ministries and attached offices, commodity boards, oil companies, individual industrial units, leading manufacturers, business houses, chambers of commerce and trade associations,” Mr Mukherjee said.

He added data collection for the consumer price index (urban) has started, but did not give a time frame for its completion. The National Statistical Commission had in 2001 recommended that the Central Statistical Organisation compile a single national consumer price index by computing the CPI (Urban) and CPI (Rural) separately and then combining them together into an all-India index in line with global practice to improve accuracy and help policy makers in tracking price movements.

“The WPI will now become more representative of today’s reality. I believe it will come along with the revision in commodities and weights,” rating agency Crisil Principal
Economist DK Joshi said.

WPI AND CPI

Most of the major economies like US, UK, Japan, France, Singapore and even our arch rival China have selected CPI as its official barometer to weigh its inflation. But our country, India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.

The main difference between WPI and CPI is that wholesale price index measures inflation at each stage of production while consumer price index measures inflation only at final stage of production.

In last post we discussed about WPI, now let’s have a better understanding of CPI and how it’s better from WPI:

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

In use of WPI there are certain problems which have been encountered.
· Economists say that main problem with WPI is that more than 100 out of 435 commodities included in the index have abstained to be important from consumption point of view. Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
· WPI measures general level of price changes either at level of wholesaler or at the producer and does not take into account the retail margins. Therefore we see here that WPI does give the true picture of inflation.
· In present day service sector plays a key role in indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorpated in calculation of WPI.
· Moreover the inflation figures that we get on Friday hardly makes a differnce to consumers, as the commodites on which inflation is calculated are not part individual consumers budget. Therefore in order to know what exact number of inflation is affecting your budget , it is advisible you should do your own calculation. You can compare your expenditure for previous years and with present scenario required to maitain your lifestyle and you ill come to know that increase in expenditure would be a few times higher than the official inflation figure.

But it is not easy for country like india to adopt to CPI , as in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are:
· CPI Industrial Workers;
· CPI Urban Non-Manual Employees;
· CPI Agricultural labourers; and
· CPI Rural labour.
Apart from this official staements say that there is too much of lag in reporting of CPI numbers, which makes it difficult for india to calcualte inflation based on CPI figures.
India calcualtes inflation on weekly basis , whereas CPI figures are available on monthly basis. So all this give little ground for indian government to adopt CPI in calculating inflation.

Economic Theories

Economic System

An economic system is a structure of the functioning of an economy. The structure basically shows the freedom or restrictions imposed on the people living in the country in relation to use of resources of the country for the purpose of economic growth and economic objectives of the country. Broadly, there are three types of economic systems namely, Capitalism, Socialism and Mixed Economy.

Of the present-day economic systems, capitalism is perhaps the oldest. Though it has come under heavy criticism in the recent past, it still retains its existence in one of the most prosperous and powerful countries in the world, USA., besides several other smaller countries. Capitalism basically has the following features:
  • Private Ownership of Property
  • The right of Inheritance
  • Competition
  • Profit Motive
  • Economic Inequality
  • Concentration of Economic Control in the Selected few.
Socialism is an economic organisation of society in which the material means of production are owned by the whole community and operated by organs representative of and responsible to the community according to the general plan, all members of the community being entitled to benefit from the results of such socialized-planned production on the basis of equal rights. Socialism basically has the following features:
  • Ownership of means of production by the State as representative of the community.
  • General Planning of the economic activity.
  • Equitable distribution of national income among the people.
Mixed represents the intermediate system between capitalism and socialism. In several countries of the world, it is this economic system, which has been accepted by people and governments. An important characteristic of mixed economy is the existence of two sectors, viz., the private sector and the public sector.

Economic Theories

Macro and Micro Economics

Macro Economics may be defined as that branch of economic analysis which studies the behaviour of not one particular unit, but of all the units combined together. Macroeconomics is a study of aggregates. It is the study of the economic system as a whole � total production, total consumption, total savings and total investment. The following are the fields covered by macroeconomics:
  • Theory of Income, Output and Employment with its two constituents, namely, the theory of consumption function, the theory of investment function and the theory of business cycles or economic fluctuations.
  • Theory of Prices with its constituents of the theories of inflation, deflation and reflation.
  • Theory of Economic Growth dealing with the long-run growth of income, output and employment.
  • Macro Theory of Distribution dealing with the relative shares of wages and profits in the total national income.
The study of macroeconomics is indispensable as it is the main agent for formulation and successful execution of government economic policies. It is also indispensable for the formulation of microeconomic models.

Microeconomics may be defined as that branch of economic analysis, which studies the economic behaviour of the individual unit, maybe a person, a particular household, or a particular firm. It is a study of one particular unit rather than all the units combined together. In microeconomics, we study the various units of the economy, how they function and how they reach their equilibrium. An important tool used in that of microeconomics is that of Marginal Analysis. In fact, it is an indispensable tool used in microeconomics. Some of the important laws and principles of microeconomics have been derived directly from marginal analysis. The following are the fields covered by microeconomics:
  • Theory of Product pricing with its two constituents, namely, the theory of consumer behaviour and the theory of production and costs.
  • Theory of Factor pricing.
    • Theory of Economic Welfare.

  • Economic Growth

    The economic growth of a country is mainly determined by two variables, namely, capital stock and labour force. These two variables are further influenced by various sub variables like human endowments, social attitudes, political conditions and historical accidents. The following describes broadly the variables mentioned above.

    Economic Factors: A country can grow economically only if the rate of growth of output exceeds the rate of growth of population by a significant margin. The following are further classifications of the economic factors.
    • Rate of capital formation: Capital formation is the most crucial and strategic determinant of economic growth. The history of all the advanced countries bears testimony to the fact that their periods of expansion have always been characterized by a high rate of capital formation. Capital formation implies not just the capacity to save but capacity to invest into productive uses. Usually the structure of the economy together with governmental incentives or encouragement play a major role in channelling the capital savings into capital investment to boost economic growth.
    • Capital-Output Ratio: The capital output ratio is also known as Investment Income or Capital Coefficient. The capital-output ratio states the relationship between capital investment and the emergent output consequent upon the investment. A lower capital-output ratio is desirable as it shows the efficient use of capital. The capital-output ratio is determined by a large variety of factors, such as, the degree of technological development, rate and pattern of investment, density of population, quality of managerial and organisational skill, etc.
    • Rate of Growth of Population: As pointed out earlier, economic growth depends on the excess of rate of output over the rate of growth of population. The rapid growth of population in most of the underdeveloped countries thus negates the economic development in such countries.
    Socio Cultural Factors: The socio cultural attitudes of people in developing and under developing countries also retard economic growth. The socio cultural aspects can be due to certain social taboos, social institutions which act as barriers to economic thought and economic pursuits, religion, literacy and other such social factors.

    Political and Administrative Factors: The existence of a strong, competent, sympathetic and incorrupt administration is perhaps the sine qua non for accelerated economic growth. It is this particular factor that is more important than capital formation.

    PAYMENT SYSTEMS
    The primary goal of any national payment system is to enable the circulation of money in its economy. It is recognised world wide that an efficient and secure payment system is an enabler of economic activity. It provides the conduit essential for effecting payments and transmission of monetary policy.
    The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), the apex body for regulation and supervision of payment systems, is the authority designated with the responsibility of regulating and overseeing smooth functioning of the payment systems in the country. The vision would be achieved under the overall guidance, direction and supervision of the BPSS.
    National Payments Corporation of India Ltd. (NPCI), a company to operate retail payments has been set-up and made operational from April 2009.

    4. Payment Systems – Current Status
    There are diverse payment systems functioning in the country, ranging from the paper based systems where the instruments are physically exchanged and settlements worked out manually to the most sophisticated electronic fund transfer system which are fully secured and settle transactions on a gross, real time basis. They cater to both low value retail payments and large value payments relating to the settlement of inter-bank money market, Government securities and forex transactions.
    The retail payment systems in the country comprise both paper based as well as electronic based systems. They typically handle transactions which are low in value, but very large in number, relating to individuals firms and corporates. These transactions relate mainly to settlement of obligations arising from purchase of goods and services. In India there are about 1050 cheques clearing houses. These clearing houses clear and settle transactions relating to various types of paper based instruments like cheques, drafts, payment orders, interest / dividend warrants, etc. In 40 of these clearing houses, cheque processing centres (CPCs) using MICR technology have been set up. At 14 more clearing houses, MICR cheque processing systems are proposed to be set up. The clearing houses at 16 places including the 4 metros are managed by the Reserve Bank which also functions as the settlement banker at these places. In other places the clearing houses are managed by the State Bank of India and certain other public sector banks and the settlement bank functions are also performed by the respective banks. The clearing houses are voluntary bodies set up by the participating banks and post offices and they function in an autonomous manner. The Reserve Bank has issued the Uniform Regulations and Rules for Bankers’ Clearing Houses (URRBCH) which have been adopted by all the clearing houses. These regulations and rules relate to the criteria for membership / sub-membership, withdrawal / removal / suspension from membership and the procedures for conducting of clearing as well as settlement of claims between members.
    There are various types of electronic clearing systems functioning in the retail payments area in the country. Electronic Clearing System (ECS), both for Credit and Debit operations, functions from 46 places (15 managed by Reserve Bank and the rest by the State Bank of India and one by State Bank of Indore). The ECS is the Indian version of the Automated Clearing Houses (ACH) for catering to bulk payments. The Electronic Funds Transfer (EFT) System is operated by the Reserve Bank at 15 places. This is typically for individual / single payments. These systems are governed by their own respective rules. A variant of the EFT, called the Special Electronic Funds Transfer (SEFT) System is also operated by the Reserve Bank to provide nation-wide coverage for EFT. All these electronic fund transfer systems settle on deferred net settlement basis.
    There are a few large value payment systems functioning in the country. These are the Inter-Bank Cheques Clearing Systems (the Inter-bank Clearing), the High Value Cheques Clearing System (the High Value Clearing), the Government Securities Clearing System (the G-Sec Clearing), the Foreign Exchange Clearing System (the Forex Clearing) and the Real Time Gross Settlement (RTGS) System. All these systems except the High Value Clearings are electronic based systems. These mostly relate to interbank / inter-financial institutional transactions except the High Value Clearing where high value customer cheques are cleared. The Inter-bank Clearing functions in 7 places and the High Value Clearing in 15 places - both are managed by the Reserve Bank. The G-Sec Clearing and the Forex Clearing are managed by the Clearing Corporation of India Limited (CCIL). The RTGS System is operated by the Reserve Bank. All these are deemed to be Systemically Important Payment Systems (SIPS) and therefore the Reserve Bank has, in line with the international best practices in this regard, moved them (except the Inter-bank Clearings at places other than Mumbai and the High Value Clearings) to either secure and guaranteed systems or the RTGS System.
    Increase in threshold of high value cheques and discontinuation of high value clearing : In view of the various risks associated with use of paper-based instruments for clearing and settlement of large-value transactions, the process of migration of large-value payments to the electronic mode was initiated. The threshold limit for cheques eligible to be presented in High Value Clearing has been enhanced from the present Rs.1 lakh to Rs.10 lakh and the high value clearing has been discontinued at a couple of locations.
    CHEQUE AND DRAFT
    The Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank undertakes to make payment in full when the instrument is presented by the payee for payment. The demand draft is made payable on a specified branch of a bank at a specified centre. In order to obtain payment, the beneficiary has to either present the instrument directly to the branch concerned or have it collected by his / her bank through the clearing mechanism.
       A cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. The maker of a cheque is called the 'drawer', and the person directed to pay is the 'drawee'. The person named in the instrument, to whom or to whose order the money is, by the instrument directed, to be paid, is called the 'payee'. A cheque is a Negotiable Instrument, which can be further negotiated by means of endorsement and is payable on demand. A cheque payable to bearer is negotiable by the delivery thereof, and when it is payable to order is negotiable by the holder by endorsement and delivery thereof. A cheque has to be presented for payment by the payee or holder to the acceptor, maker or drawer. A cheque payment is a debit transaction as the transaction regarding the payment of a cheque is initiated by the payee or beneficiary.
    The Negotiable Instruments Act, 1881 (N.I. Act) continues to be the predominant legal base for all cheque-based (instrument-based) payment systems in India. It has been amended time and again to accommodate new requirements and policies. The latest amendments in respect of the definition of 'cheque' by inclusion of the 'electronic image of a truncated cheque' and a 'cheque in the electronic form' have opened up avenues for introducing new methods of processing paper-based payment instruments. Simultaneous amendment to the Information Technology Act, 2000, making it applicable to the N.I. Act, has accorded legal status to the usage of electronic payment systems in Indian banking
    Money Market Instruments
    Money Market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money Market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and governments manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and banker's acceptances are bought and sold.
    Benefits and functions of Money Market

    Money Markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of Money Market is to provide focal point for RBI's intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the Money Market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives.
    Money Market & Capital Market:

    Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against Money Market which is more secure. In case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.

    Treasury Bills:-
    Treasury Bills are Money Market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price
    Treasury Bills or T-Bills as they are known are issued by the Government of India to meet their short-term requirement. T-Bills are issued for 91-day, 182-day and 364-day maturities. T-Bills are issued at a discount to their face value and redeemed at par.
    364-day T-Bills forms part of the government borrowing programme.There are three types of Treasury Bills.
    91-day T-bill - maturity is in 91 days. Its auction is weekly on every Wednesday.
    182-day T-bill - maturity is in 182 days. Its auction is on every alternate Wednesday other than a reporting week.
    364-Day T-bill - maturity is in 364 days. Its auction is on every alternate Wednesday in a reporting week.

    Features of T-Bills auction
    ·                                 All T-Bills auctions are Price-based.
    ·                                 All T-Bills are auctioned on Multiple-Price basis.
    The RBI auctions 91-day T-Bills every Wednesday, 182-day T-Bills on every alternate wednesday and 364-day T-Bills on the Wednesday of the reporting Friday week.
    Commercial Papers:
    Commercial Paper is a low-cost alternative to bank loans. It is a short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period of 6 months. It will not be able to liquidate its receivables before 6 months. The company is in need of funds. It can issue commercial papers in form of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers easily. The company is able to liquidate its receivables immediately and the buyer is able to earn interest of Rs 10K over a period of 6 months. They yield higher returns as compared to T-Bills as they are less secure in comparison to these bills. Chances of default are almost negligible but are not zero risk instruments. Commercial Paper being an instrument not backed by any collateral, only firms with high quality credit ratings will find buyers easily without offering any substantial discounts. They are issued by corporates to impart flexibility in raising working capital resources at market determined rates. Commercial Papers are actively traded in the secondary market since they are issued in the form of promissory notes and are freely transferable in demat form.
    Certificate of Deposit:

    It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand. The returns on Certificate of Deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is based on compounded interest calculation. However, in APR method, simple interest calculation is done to generate the return. Accordingly, if the interest is paid annually, equal return is generated by both APY and APR methods.
    However, if interest is paid more than once in a year, it is beneficial to opt APY over APR.

    Advantages of Certificate of Deposit as a money market instrument
    1.       Since one can know the returns from before, the certificates of deposits are considered much safe.

    2.       One can earn more as compared to depositing money in savings account.
    Disadvantages of Certificate of Deposit as a Money Market instrument:
    1.       As compared to other investments the returns is less.
    2.       The money is tied up along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity.

    Repo / Reverse Repo:

    A repo agreement is the sale of a security with a commitment to repurchase the same security as a specified price and on specified date while a reverse repo is purchase of security with a commitment to sell at predetermined price and date. A repo transaction for party would mean reverse repo for the second party. In lieu of the loan, the borrower pays a contracted rate to the lender, which is called the repo rate. As against the call money market  where the lending is totally unsecured, the lending in the repo is backed by a simultaneous transfer of securities. The main players in this market are all institutional players like Banks,Primary Dealers, financial institutions, mutual funds, insurance companies etc. allowed to operate a SGL with the Reserve Bank of India.

    RBI also operates daily repo/ reverse repo auctions to provide benchmark rates in the markets as well as managing in the liquidity in the system. RBI sucks or injects liquidity in the banking system by daily repo/ reverse operations. Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions.
    Inter Corporate Deposits:

    Inter Corporate Deposits are unsecured loans extended by corporate with excess funds to other corporate bodies. The rates in this market are higher as compared to that of other markets.

    An ICD is an unsecured loan extended by one corporate to another. This market allows corporates with surplus funds to lend to other corporates. Also the better-rated corporates can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than that for a bank, the rates in this market are higher than those in the other markets. Also, as ICDs are unsecured, the risk inherent is high and the risk premium is also built into the rates.

    RBI permits Primary Dealers to accept Inter- Corporate Deposits upto fifty percent of their Net Worth and for a period of not less than 7 days. Primary Dealers cannot lend in the ICD market. Apart from CPs, corporate also have access to another market called the inter corporate deposits (ICD) market.


    Collateralized Borrowing and Lending Obligation (CBLO):

    “Collateralized Borrowing and Lending Obligation (CBLO)", a money market instrument as approved by RBI, is a product developed by CCIL for the benefit of the entities who have either been phased out from Inter Bank Call Money Market or have been given restricted participation in terms of ceiling on call borrowing and lending transactions and who do not have access to the call money market. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety days (can be made available up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CBLO is an obligation by the borrower to return the money borrowed, at a specified future date; An authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received; An underlying charge on securities held in custody for the amount borrowed/lent.

    It is a money market instrument that enables entities, which have restricted participation in the call money market, to borrow and lend
    ·                                 It is a discounted instrument which can be traded on CBLO Screen
    ·                                 It is on electronic trading platform with the matching of the bids and yields take place on Best Yield-Time Priority basis

    The maturity ranges generally from 1 day to 90 days and can also be made available up to 1 year
    ·                                 Central Government Securities including T-Bills are eligible securities that can be used as collateral for CBLO
    Call Money / Notice Money /Term Money:
    The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the Interbank Market.

    Banks borrow in this money market for the following purpose:
    ·                                 To fill the gaps or temporary mismatches in funds
    ·                                 To meet the CRR & SLR mandatory requirements as stipulated by the RBI.
    ·                                 To meet sudden demand for funds arising out of large outflows.
    ·                                 Thus call money usually serves the role of equilibrating the short-term liquidity position of banks
    Call Money Market Participants:
    ·                                 Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs
    Synopsis

    Call Money - funds borrowed / lent for 1 day (overnight ),
     
    Notice Money - funds borrowed / lent for more than one day but upto a maximum of 14 days,
     
    Term Money - funds borrowed / lent for 15 days and more upto a maximum period of 1 year,
    Participants: Banks (excluding RRBs) and Primary Dealers (PDs),
    Interest Rate: Eligible participants are free to decide on interest rates

    Reporting Requirement:

    Participants needs to report on NDS - Call system from September 18, 2007 & Deals should be reported with in 15 mins on NDS. In normal conditions when the liquidity is high, the Call rates hovers between LAF Repo and Reverse Repo rates
    Thus Call / Notice / Term money market
    ·                                 Is an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded.
    ·                                 The loans are of short-term duration (1 to 14 days). Money lent for one day is called 'call money'; if it exceeds 1 day but is
    less than 15 days it is called 'notice money'. Money lent for more than 15 days is 'term money'
    ·                                 The borrowing is exclusively limited to banks & PDs, who are temporarily short of funds.
    ·                                 Call loans are generally made on a clean basis- i.e. no collateral is required
    ·                                 The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other
    banks in temporary deficit of funds
    ·                                 The call market helps banks economise their cash and yet improve their liquidity
    ·                                 It is a highly competitive and sensitive market

    It acts as a good indicator of the liquidity position Participants
    ·                                 Those who can both borrow and lend in the market - RBI (through LAF), banks and primary dealers
    ·                                 Once upon a time, select financial institutions viz., IDBI, UTI, Mutual Funds were allowed in the call money market only on the lender's side
    ·                                 These were phased out and call money market is now a pure inter-bank market (since August 2005)

    Banker's Acceptance:
    It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary Market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.

    Although BA's, as they are known, have their origin in trade bills issued by merchants, today they are an important money market instrument. A banker's acceptance is simply a bill of exchange drawn by a person and accepted by a bank. The person drawing the bill must have a good credit rating otherwise the BA will not be tradable. The drawer promises to make payment of the face value upon a given future date. The most common term for these instruments is 90 days. They can very from 30 days to180 days. The BA has the advantage of locking the borrower in to a fixed rate over the term of the bill. This can be important if a rise in short-term rates is expected.
    Short Term Money Market instruments India
    The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an opportunity for balancing the short-term surplus funds of lenders and the requirements of borrowers. By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. There is a wide range of participants(banks, primary dealers, financial institutions, mutual funds,trusts,provident funds etc.) dealing in money market instruments. Money Market Instruments and the participants of money market are regulated by RBI and SEBI.As a primary dealer SBI DFHI is an active player in this market and widely deals in Short Term Money Market Insrtruments.The below mentioned instruments are normally termed as money market instruments:
    1.       Call/ Notice/ Term Money
    2.       Repo/ Reverse Repo
    3.       Inter Corporate Deposits
    4.       Commercial Paper
    5.       Certificate of Deposit
    6.       T-Bills
    7.       Inter Bank participation certificates
    Govt Securities
    Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities.
    Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. Since the date of maturity is specified in the securities, these are known as dated Government Securities, e.g. 8.24% GOI 2018 is a Central Government Security maturing in 2018, which carries a coupon of 8.24% payable half yearly.

    Features of Government Securities
    1. Issued at face value
    2. No default risk as the securities carry sovereign guarantee.
    3. Ample liquidity as the investor can sell the security in the secondary market
    4. Interest payment on a half yearly basis on face value
    5. No tax deducted at source
    6. Can be held in D-mat form.
    7. Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs).
    8. Redeemed at face value on maturity
    9. Maturity ranges from of 2-30 years.
    10. Securities qualify as SLR investments (unless otherwise stated).
    The dated Government securities market in India has two segments:
    1. Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of non-competitive bidding for small investors (see SBI DFHI Invest on our website for further details).
    2. Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates and Individuals can invest in Government Securities. The eligibility criteria is specified in the relative Government notification.
    Auctions: Auctions for government securities are normally multiple- price auctions either yield based or price based.
    Yield Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted
    Price Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing Government Securities. Bids at price lower then the cut off price are rejected and bids higher then the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction.
    Occasionally RBI holds uniform-price auctions also.
    Underwriting in Auction: One day prior to the auction, bids are received from the Primary Dealers (PD) indicating the amount they are willing to underwrite and the fee expected. The auction committee of RBI then examines the bid on the basis of the market condition and takes a decision on the amount to be underwritten and the fee to be paid. In case of devolvement, the bids put in by the PD’s are set off against the amount underwritten while deciding the amount of devolvement and in case the auction is fully subscribed, the PD need not subscribe to the issue unless they have bid for it.
    G-Secs, State Development Loans & T-Bills are regularly sold by RBI through periodic public auctions. SBI DFHI Ltd. is a leading Primary Dealer in Government Securities. SBI DFHI Ltd gives investors an opportunity to buy G-Sec / SDLs / T-Bills at primary market auctions of RBI through its SBI DFHI Invest scheme (details available on website ). Investors may also invest in high yielding Government Securities through “SBI DFHI Trade” where “buy and sell price” and a buy and sell facility for select liquid scrips in the secondary markets is offered.
    Treasury bills
    Treasury Bills are short term (up to one year) borrowing instruments of the Government of India which enable investors to park their short term surplus funds while reducing their market risk.
    ·                                 They are auctioned by Reserve Bank of India at regular intervals and issued at a discount to face value. On maturity the face value is paid to the holder.
    ·                                 The rate of discount and the corresponding issue prices are determined at each auction. When liquidity is tight in the economy, returns on Treasury Bills sometimes become even higher than returns on bank deposits of similar maturity.
    ·                                 Any person in India including Individuals, Firms, Companies, Corporate bodies, Trusts and Institutions can purchase Treasury Bills. Treasury Bills are eligible securities for SLR purposes.
    ·                                 Treasury Bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000 thereafter. They are available in both Primary and Secondary Market.
    ·                                 Treasury Bills are issued in the form of SGL - entries in the books of Reserve Bank of India to hold the securities on behalf of the holder. The SGL holdings can be transferred by issuing a SGL transfer form
    ·                                 Treasury Bills are also being issued  under the Market Stabilization Scheme (MSS)
     
    Type of Treasury Bills:
    At present, RBI issues T-Bills for three different maturities: 91 days, 182 days and 364 days. The 91 day T-Bills are issued on weekly auction basis while 182 day T-Bill auction is held on Wednesday preceding Non-reporting Friday and 364 day T-Bill auction on Wednesday preceding the Reporting Friday
    Advantages of investing in Treasury Bills:
    ·                                 No Tax Deducted at Source (TDS)
    ·                                 Zero default risk as these are the liabilities of GOI
    ·                                 Liquid Money Market Instrument
    ·                                 Active secondary market thereby enabling holder to meet immediate fund requirement.
    SBI DFHI Ltd, is an active player in the both the primary and the secondary market for Treasury Bills with an impressive total outr.ight turnover of Rs.10,176 crores.
    State Development Loans
    State Development Loans (SDLs)  are issued by the State Governments and RBI coordinates the actual process of  selling these securities. Each state is allowed to issue securities up to a  certain limit each year. Generally, the coupon rates  on State Development Loans are marginally higher than those of GOI-Secs issued  at the same time.
    The State Development Loans are normally sold through the auction process. All  the auctions are multiple price auctions, through competitive bidding,  conducted by Reserve Bank of India  and allotment procedure is similar to that for GOI-Secs. Non-competitive  bidding has been introduced in the auction of SDL. State Development  Loans also qualify for SLR status. Interest payment frequency is half yearly  and other modalities are similar to GOI-Secs. They are issued in dematerialized  form. State Government Securities can be issued in the physical form (in the  form of Stock Certificate) on seperate request and are transferable. Like in the case of G-Secs no  stamp duty is payable on transfer of State Development Loans also.
    State Development Loans are eligible securities for Liquidity Adjustment  Facility (LAF)-Repos. Schedule Commercial Bank(excluding RRBs) and Primary  Dealers can offer State Development Loans as eligible securities to the RBI  under LAF Repo.
    SBI DFHI is a Primary Dealer and an active player in State Development Loans  market. It also participates in the SDL auction. As a primary dealer SBI DFHI  also participates in the underwriting of auction of SDLs. One day prior to the  auction, bids are submitted by Primary Dealers (PD) to RBI indicating the  amount they are willing to underwrite and the fee expected. RBI, along with  State Govt representatives, then examine the bids on the basis of the market  conditions and take a decision on the amount to be underwritten and the fee to  be paid. State Development Loans are traded in secondary market but are much  less liquid than GOI Secs. SBI DFHI is an active player in primary as well as secondary market

    Corporate Bond
    Non SLR Bonds India
    Securities having SLR status, as specified by RBI, are eligible securities for investment by banks to meet their SLR commitments under Sec 24 (2-A) of the B. R. Act, 1949. As the name suggest, investment in Non-SLR bonds cannot be considered eligible for SLR requirement. These include PSU Bonds, Corporate Bonds and even certain Government Securities like Oil Bonds, Food Bonds, Fertilizer Bonds, etc.
    Public Sector Undertaking Bonds (PSU Bonds) : These are Medium or Long Term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds issued by the central PSUs (i.e. PSUs funded by and under the administrative control of the Government of India). Most of the PSU Bonds are sold on Private Placement Basis to the targeted investors at market determined interest rates. Often investment bankers are roped in as arrangers to this issue. PSU Bonds are issued in demat form. In order to attract the investors and increase liquidity, issuers get their bonds rated by rating agencies like CRISIL, ICRA, CARE, etc. Some of the issues may be guaranteed by Central / State Government enabling them to get a better rating. The bonds may carry call / put option.

    Corporate Bond : Corporate Bonds are issued by public sector undertakings and private corporations for a wide range of tenors but normally upto 15 years. However, some Banks and Companies like Reliance have also issued Perpetual Bonds.
    Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, its rating, the current market conditions and the sector in which the Company is operating. Corporate bond holders are compensated for this risk by receiving a higher yield than government bonds. Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Some even carry a put-option for the benefit of the investors. Other bonds, known as convertible bonds, allow investors to convert the bond into equity.
    •  
         REVISED WHOLESALE PRICE INDEX FROM 14 SEPT 2010

Headline inflation in India is measured in terms of Wholesale Price Index (WPI) and the Office of the Economic Adviser, Department of Industrial Policy & Promotion is entrusted with the task of releasing this index.  WPI is an important statistical indicator, as various policy decisions of the Government, like inflation management, monitoring of prices of essential commodities etc., are based on it. It is one of the key variables for monetary policy changes by the Reserve Bank of India. In addition to its role as a policy variable, WPI is also used by various departments for arriving at the escalation costs of various contracts.
Considering the importance of WPI as a tool for various policy decisions, it is necessary to disseminate the most comprehensive, credible and accurate information, reflecting the realities of the present economic situation of the country. In order to capture the structural changes happening in the economy, the base year of WPI needs to be updated. The Office of the Economic Adviser undertook the work relating to revision of the existing series of WPI (base 1993-94=100), which not only addressed the issue of change in base year, but also revised the entire commodity basket and the weighting diagram so as to better reflect the price trends in economy. The revised series of WPI was officially launched on 14 September, 2010 by the Hon’ble Minister for Commerce & Industry.
Features of the Revised Series of WPI
A representative commodity basket comprising 676 items has been selected in the new series (base 2004-05=100) as against 435 in the old series (base 1993-94=100) and weighting diagram has been derived for the new series consistent with the structure of the economy. There has been a substantial increase in the number of quotations selected for collecting price data for the above items. The number of price quotations for the new series is 5482 whereas in the old series, it was 1918.
The selection of the base year and the commodity basket was made on the basis of the recommendations of the Working Group set up specifically for this purpose.  The Working Group was headed by Professor Abhijit Sen, Member,Planning Commission and included as its Members all stake-holders covering the users of the price data and the providers of the prices.  The working group in its Technical Reports gave detailed recommendations with regard to the choice of the base year, the method of selection of items, preparation of weighting diagram and the collection of prices.  The new index along with the base year and the commodity basket was also examined by Technical Advisory Committee (TAC) on Prices and Cost of Living based in Central Statistical Organisation.  Before the launch of the new index, inter-departmental consultations were held and opinions obtained from Economic Advisory Council of the Prime Minister.
PLANNING COMMISION 
The Planning Commission in India was set up on March 1950 to promote a rapid rise in the standard of living of the people by utilizing the resources of the country, increasing production and offering employment opportunities to all. The Planning Commission has the responsibility for formulating plans as to how the resources can be used in the most effective way.

The Planning Commission has to make periodic assessment of all resources in the country, boost up insufficient resources and formulate plans for the most efficient and judicious utilization of resources.

Jawaharlal Nehru was the first chairman of the Planning Commission.

Structure of the Planning Commission:
The Prime minister is the chairman of the Planning Commission. The Deputy Chairman and the full time members give advice and guidance for the formulation of Five Year Plan, Annual Plans, State Plans, Projects and Schemes etc. Currently the structure of the planning commission is like this:

1. Chairman - Dr. Manmohan Singh
2. Deputy Chairman- Shri Montek Singh Ahluwalia
3 Minister of State- Shri M.V. Rajshekharan
4. Members - Dr. Kirit Parikh,Prof. Abhijit Sen ,Dr. V.L. Chopra ,Dr. Bhalchandra Mungekar ,Dr.(Ms.) Syeda Hameed ,Shri B.N. Yugandhar ,Shri Anwar-ul-Hoda, Shri B. K. Chaturvedi
5. Secretary- Dr. Subhas Pani

Functions of the Planning Commission India:

Following are the functions of the Planning Commission of India:
  • To make an assessment of the resources of the country and to see which resources are deficient.
  • To formulate plans for the most effective and balanced utilization of country's resources.
  • To indicate the factors which are hampering economic development.
  • To determine the machinery, that would be necessary for the successful implementation of each stage of plan.
  • Periodical assessment of the progress of the plan.
  • With the changing times, the Planning commission is preparing itself for long term vision for the future. The commission is seeing to maximize the output with minimum resources.
  • From being a centralized planning system, the Indian economy is slowly progressing towards indicative planning wherein the Planning Commission has set the goal of constructing a long term strategic vision for the future.
  • It sets sectoral targets and provides the catalyst to the economy to grow in the right direction.
  • The Planning Commission plays an integrative role in the development of a holistic approach to the formulation of policies in critical areas of human and economic development.
Eleventh Five Year Plan 2007-12
The Planning Commission was set up by a Resolution of the Government of India in March 1950 in pursuance of declared objectives of the Government to promote a rapid rise in the standard of living of the people by efficient exploitation of the resources of the country, increasing production and offering opportunities to all for employment in the service of the community.

The Twelfth Five Year Plan will commence in 2012-13. Before the Plan itself is unveiled, the Planning Commission normally prepares an Approach Paper which lays out the major targets, the key challenges in meeting them, and the broad approach that must be followed to achieve the stated objectives.
The Approach Paper is approved by the Cabinet and the National Development Council which includes all the Chief Ministers of the States. It provides the architecture which is fleshed out in detail in the Plan itself.
FINANCE COMMISION
The Finance Commission of India came into existence in 1951. The Finance commission is established under article 280 of the Indian Constitution of India by the President of India. The Indian Finance Commission Act was passed to give a structured format to the Finance Commission of India as per the world standard. The need for the Finance Commission was felt by the British for guiding the finance of India. The structure of the modern Act was laid in the early 1920's. The Finance Commission is formed to define the financial relations between the centre and the state. The Finance Commission Act of 1951 tells about the qualification, appointment, term, eligibility, disqualification, powers etc of the Finance Commission.

Functions Of The Finance Commission
The Finance Commission's duty is to recommend to the President as to-
  • The distribution of net proceeds of taxes between the Union and the States.
  • To evaluate the increase in the Consolidated Fund of a state to affix the resources of the Panchayat in the state.
  • To evaluate the increase in the Consolidated Fund of a state to affix the resources of the Municipalities in the state.
Implementation Of The Recommendation Of Finance Commission

The recommendation of the Finance Commission are implemented
  • By an order of the President or by executive orders.
Powers of the Commission:

The Finance Commission has the following powers:
  • The Commission shall have all the powers of the
    Civil Court
     as per the Code of Civil Procedure, 1908.
  • It can call any witness, or can ask for the production of any public record or document from any court or office.
  • It can ask any person to give information or document on matters as it may feel to be useful or relevant.
  • It can function as a civil court in discharging its duties.

ECONOMIC ADVISORY COUNCIL TO PM
The importance of Economic Advisory Council can be gauged by the fact that Sh. Atal Bihari Vajpayee the then Prime Minister, was the chairman of the Economic Advisory Council. The present Economic Advisory Council is headed by Dr. C. Rangarajan. The Council has the following economists as its members
Mr. Suman K. Bery Member
Dr. Saumitra Chaudhuri Member
Dr. M. Govinda Rao Member
Dr. V.S. Vyas Member
(Report submitted to the Prime Minister on July 22, 2010
It is the assessment of the Council that the Indian economy
would grow at 8.5 per cent in 2010/11 and 9.0 per cent in 2011/12. In the current
fiscal year, agriculture will grow at 4.5 per cent, industry at 9.7 per cent and
services at 8.9 per cent.


Unique identification project was initially conceived by the Planning Commission as an initiative that would provide identification for each resident across the country and would be used primarily as the basis for efficient delivery of welfare services. It would also act as a tool for effective monitoring of various programs and schemes of the Government.

At the same time, the Registrar General of India was engaged in the creation of the National Population Register and issuance of Multi-purpose National Identity Cards to citizens of India.

Therefore, it was decided, with the approval of the Prime Minister, to constitute an empowered group of Ministers (EGoM) to collate the two schemes – the National Population Register under the Citizenship Act, 1955 and the Unique Identification Number project of the Department of Information Technology. The EGoM was also empowered to look into the methodology and specific milestones for early and effective completion of the Project and take a final view on these. The EGoM was constituted on 04 December 2006. meeting of the EGoM was held on 28 January 2008. It decided on the strategy for the collation of NPR and UIDAI. Inter-alia, the proposal to establish UIDAI Authority under the Planning Commission was approved.

UIDAI would be anchored in the Planning Commission for five years after which a view would be taken as to where the UIDAI would be located within Government.
In pursuance of the Empowered group of Ministers' fourth meeting dated 04 November 2008, the Unique Identification Authority of India was constituted and notified by the Planning Commission on 28 January 2009 as an attached office under the aegis of Planning Commission with an initial core team of 115 officials. The role and responsibilities of the UIDAI was laid down in this notification. The UIDAI was given the responsibility to lay down plan and policies to implement UIDAI scheme and shall own and operate the UIDAI database and be responsible for its updation and maintenance on an ongoing basis.

Prime Minister's Council
Prime Minister's Council on UIDAI Authority - Subsequently, on 02 July 2009, the Government appointed Shri. Nandan M. Nilekani as Chairman of the Unique Identification Authority of India, in the rank and status of a Cabinet Minister for an initial tenure of five years. Mr. Nilekani has joined the UIDAI as its Chairman on 23 July 2009. The Prime Minister's Council of UIDAI Authority of India was set up on 30 July 2009. The Council is to advise the UIDAI on Programme, methodology and implementation to ensure co-ordination between Ministries/Departments, stakeholders and partners. The Council would meet once every quarter. The First Meeting of the Prime Minister's Council of UIDAI Authority took place on 12 August 2009.

What is Aadhaar?


Aadhaar is a 12 digit unique number which the Unique Identification Authority of India (UIDAI) will issue for all residents. The number will be stored in a centralized database and  linked to the basic demographics and biometric information – photograph, ten fingerprints and iris of each individual. The details of the data fields and verification procedures are available here.

The basic challenge is demand generation, as it’s a voluntary programme. But the disadvantaged in the society do feel a strong need for such an equaliser. Those will be a focus audience for us," he says.

Considering privacy concerns , UIDAI has kept provision of voluntary registration at enrolment camps to obtain the number. Critics, however, argue that once the programme gets linked to welfare programmes, the PDS system and availing of various services , it will lose its true voluntary nature. Hence, it’s also important to have stringent laws to prevent denial of service in such situations.
MAIDEN LAUNCH OF UID IN MAHARASHTRA
Mumbai: Prime Minister Manmohan Singh and Congress President Sonia Gandhi today on Wednesday (September 29) handed out the first unique identification numbers at the inaugural function of Aadhar/ Unique Identity (UID) project in Maharashtra’s Nandurbar district. Chief Minister Ashok Chavan, his deputy Chhagan Bhujbal and UID chief Nandan Nilekani were also present at the event.
Tembhali village in Nandurbar, Maharashtra, with a population of 1,098, became the first ‘Aadhaar’ village in the country. The UID programme is expected to be completed in Maharashtra by March 2012.
Announcing the launch on Wednesday, the Unique Identification Authority of India (UIDAI) said, “The scheme would provide ‘a cost-effective, ubiquitous authentification infrastructure to easily verify identities online and in real-time’.”
“Today there are a large number of residents, especially the poorest and the most marginalised, who face challenges in accessing various public benefit programmes due to the lack of possessing a clear identity proof,” it added.
“The ‘AADHAAR’ (base) number will ease these difficulties in identification, by providing a nationally valid and verifiable single source of identity proof.”
The Unique Identity Project has been launched aimed at cutting fraud and improving public access to state benefits. Under the project, the Govt plans to give everyone a number in the coming years. The UID project is overseen by Nandan M. Nilekani, the former co-chairman of India’s second-largest software exporters Infosys Technologies.
The 12-digit Aadhaar number will be made compulsory for all government schemes and serve as unique identification number for citizens. The ID scheme would benefit local people, the majority of whom are illiterate, daily-wage labourers who often miss out on state benefits like subsidised food due to lack of identity proof.
This 12-digit number will be a link to all demographic details, bank accounts etc. A 100-rupee incentive has been offered for people to sign up for the scheme.
What is NPS
Government has announced that NPS would be available to every citizen from 1st April, 2009 on a voluntary basis
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).

This is the lowest cost self financing Social Security tool. Annual record keeping as well as fund management charges are lowest than any other investment options.

This is the first time that govt has come up with any scheme where you have got the option to take benefit of equities investment which can increase your wealth like geometric progression though it might be risky

A central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits.

These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.
A five-member committee to review the implementation of this scheme under the chairmanship of former Sebi chairman G N Bajpai, is likely to give its report in a month. Apart from what they recommend, policy makers have some changes in mind. “The scheme has not really taken off and there is need for a marketing overhaul. The Bajpai committee will submit its report soon, but we are of the view that certain caps, like (on) fund management charges, should be removed. Even if it can be raised up to one per cent, it will be one of the most competitive schemes,” PFRDA Chairman Yogesh Agarwal said on the sidelines of a function here today. The fund management charges for NPS are much lower than the industry average of 1.25-4 per cent.

Where can people sign up for the NPS?

People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks — SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.

Is the scheme open to all?

NPS is available for people aged between 18 years and 55 years.

How often should a subscriber contribute to NPS?

The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.

Subscription types

To apply for the voluntary pension scheme, there are two types of accounts:
Non- Withdraw- able account: The Tire 1 account is the basic NPS account that is non -withdrawable till retirement on in the case of death of  the subscriber. In this type of account, the total corpus at the retirement age is split, whereby a minimum of 40 percent  of  the final corpus has to be compulsorily used to buy an annuity while the subscriber is free to withdraw the remaining 60 percent as a lum sum or in installments.
Withdraw-able Account: A tier 2 account is available to only who are existing subscriber of the tier 1 account. The unique selling point of the tier 2 account is that money contributed into this account can be freely withdrawn as and when the subscriber wishes except for minimum balance that needs to be maintained at the end of each financial year.

Investment Charges


How will the subscribers get the money back?

If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.

Is the scheme tax free?

Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.

What is the default allocation of savings towards different asset classes for those who do not make an active choice?

For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.

How does the NPS compare with mutual funds?

Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.

What kind of returns would the NPS generate?

The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.

"NPS-Lite Model" has been designed to ensure ultra-low administrative and transactional costs, for making such small investments viable. NPS-Lite works on a "group" model and shall be available through "Aggregators” appointed by PFRDA. It also aims at harnessing the outreach and capacity of the Government operated schemes, NGOs, MFIs, NBFCs etc. in targeting and servicing the old age savings needs of low income workers.

“Swavalamban Scheme” of Govt of India, which grants an incentive of Rs 1000 to all eligible NPS accounts shall be available to all NPS Lite account holders as well, if they meet the prescribed criteria.


Distinguishing Features of NPS Lite:

·                             Focussed- For economically disadvantaged sections of the society and marginal investors
·                             Voluntary - Open to eligible* citizens of India, in the age group of 18–60 years. Subscriber is free to choose the amount he/she wants to invest every year.
·                             Simple – Eligible individuals in the unorganized work force can open an account through their Aggregator and get an Individual subscriber (NPS – Lite) Account.
·                             Safe - Regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
·                             Economical – Ultra-low cost structure with no minimum amount required per annum or per contribution.
·                             Portable – Subscriber can operate account from anywhere in the country, even with change of location, employment or Aggregator.

                                         SWAVALAMBAN SCHEME

The Government of India has approved the Operational Guidelines for the Swavalamban Scheme which was announced in the Finance Minister’s Budget speech of 2010-11. The Scheme is applicable to all citizens in the unorganised sector who join the New Pension Scheme (NPS) subject to their meeting the eligibility criteria. Under this Scheme, Central Government will contribute Rs.1000 per year to each NPS account opened in the year 2010-11 and for the next 3 years, i.e., 2011-12, 2012-13 and 2013-14. To be eligible, a person will have to make a minimum contribution of Rs. 1000 and maximum contribution of Rs.12000 per annum, for both Tier-I and Tier-II accounts taken together.


2. In recognition of their faith in the NPS, all NPS accounts opened in the year 2009-10 will also be entitled to the benefit of Swavalamban, subject to fulfillment of the eligibility criteria. A person will have the option to join the NPS as an individual as per the existing scheme or through the CRA Lite approved by PFRDA. The exit from the Swavalamban Scheme would be on the same terms and conditions on which exit from Tier-I account of NPS is permitted and will be subject to the condition that the minimum pension out of the accumulated pension wealth would be Rs. 1000 per month, in accordance with the provisions of Operational Guidelines.

3. The Scheme will be funded by grants from the Government of India.


The scheme will be called Swavalamban Yojana. It will be applicable to all citizens in the unorganised sector who join the New Pension System (NPS) administered by the Interim Pension Fund Regulatory and Development Authority (PFRDA).

Benefits under the Scheme
Under the scheme, Government will contribute Rs. 1000 per year to each NPS account opened in the year 2010-11 and for the next three years, that is, 2011-12, 2012-13 and 2013-14. The benefit will be available only to persons who join the NPS with a minimum contribution of Rs. 1,000 and maximum contribution of Rs. 12,000 per annum.

Definitions:
Unorganised sector: For the purpose of this scheme, a person will be deemed to belong to the unorganised sector if that person: 
·                             is not in regular employment of the Central or a state government, or an autonomous body/ public sector undertaking of the Central or state government having employer assisted retirement benefit scheme, or
·                             is not covered by a social security scheme under any of the following laws:
·                             Employees’ Provident Fund and miscellaneous Provisions Act, 1952
·                             The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948
·                             The Seamen’s Provident Fund Act, 1966
·                             The Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955
·                             The Jammu and Kashmir Employees’ Provident Fund Act, 1961


All other definitions as given in the NPS offer document will apply to the terms used in this scheme.

Eligibility:
The scheme will be applicable to all persons in the unorganised sector subject to the condition that the benefit of Central Government contribution will be available only to those persons whose contribution to NPS is minimum Rs.1,000 and maximum Rs. 12,000 per annum, for both Tier I and II taken together, provided that the person makes a minimum contribution of Rs. 1000 per annum to his Tier I NPS account.

As a special case and in recognition of their faith in the NPS, all NPS accounts opened in 2009-10 will be entitled to the benefit of Government contribution under this scheme as if they were opened as new accounts in 2010-11 subject to the condition that they fulfill all the eligibility criteria prescribed under these guidelines.

Funding
The scheme will be funded by grants from Government of India. The grants would be given such that monthly payment in the subscriber account would be possible.
Operation

A person will have the option to join the NPS as an individual as per the existing scheme or through the CRA Lite approved by PFRDA.

At the time of joining the NPS the subscriber will have to declare whether he/she falls within the definition of unorganised sector as defined in para 3 above and would also declare that his contribution would range between Rs. 1,000 to Rs. 12,000 per annum. If subsequent to opening the NPS account it is found that the subscriber has made a false declaration about his eligibility for the benefits under this scheme or has been wrongly given the benefit of government contribution under this scheme for whatsoever reason, the entire government contribution will be deducted along with penal interest as may be specified from time to time.

If the status of the subscriber changes to ineligible after joining the NPS, he/she should immediately declare so and the benefit of government contribution will not accrue to the subscriber’s account after the date on which the subscriber becomes ineligible.

At the end of each financial year the CRA will, by 7th April of the following year, send to the PFRDA details of the NPS accounts opened during the year, showing separately the number of eligible NPS accounts in which the subscriber’s contribution has been between Rs. 1,000 and Rs. 12,000. CRA will also send these details with individual PRAN to the Trustee Bank.

The exit from the Swavalamban Scheme would be on the same terms and conditions on which exit from Tier-I account of NPS is permitted, that is, exit at age 60 with 40% minimum annuitisation of pension wealth and exit before age 60 with 80% minimum annuitisation of pension wealth.

However, the exit would be subject to the overriding condition that the amount of pension wealth to be annuitised should be sufficient to yield a minimum amount of Rs. 1,000 per month. If the annuitised pension wealth does not yield an amount of Rs. 1,000 per month, the percentage of pension wealth to be annuitised would be increased so that the pension amount becomes Rs. 1,000 per month, failing which the entire pension wealth would be subject to annuitisation. This minimumpension ceiling may be revised from time to time.”

Miscellaneous
  1. PFRDA may permit members of an existing pension scheme to migrate to NPS under such terms and conditions as may be approved by the Government.


Gross NPA is the amount outstanding in the borrowal account, in books of the bank other than the interest which has been recorded and not debited to the borrowal account. Net NPAs is the amount of grosss NPAs less (1) interest debited to borrowal and not recovered and not recognized as income and kept in interest suspense (2) amount of provisions held in respect of NPAs and (3) amount of claim received and not appropriated.

The Reserve Bank of India defines Net NPA as
Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).




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