CAIIB / ADVANCE ADVANCE BANK MANAGEMENT / 4 MODULES MODULE A Supply and Demand / Money Supply and Inflation / Theoie! of Intee!t Intee!t / "u!ine!! Cy#le! / Indian e#onomy and $aiou! !e#to! of the E#onomy / E#onomi# (ECONOMIC ANALYSIS) %efom! Monetay &oli#y and 'i!#al &oli#y / D& Con#ept! / Union "udet / Challene! 'a#in Indian E#onomy Fundamentals of Eonom!s" E#onomi#! deal! *ith the podu#tion+ allo#ation and u!e of ood! and !e$i#e!, It i! fo ho* e!ou#e! #an -e!t -e di!ti-uted to meet the need! of the M!#oeonom!s and Ma#oeonom!s eate!t num-e of people, It i! the !#ien#e *hi#h !tudie! human -eha$io! a! a elation!hip -et*een end! and !#a#e mean! *hi#h ha$e altenati$e u!e!, and t$%es of eonom!s& A! pe Adam Smith+ Smith+ it i! the !tudy of ho* *ealth i! podu#ed and #on!umed 'ealt( Def!n!t!on in hi! -oo. An en0uiy into the Natue and Cau!e! of the *ealth of Nation!) A! pe &of, Alfed Alfed Ma!hal+ e#onomi#! i! a !tudy of man.ind in the odinay -u!ine!! of life, It i! a !#ien#e !#ien#e of human *elfae, So #alled a! 'elfa#e Def!n!t!on, Def!n!t!on, A! pe Lionel %o--in!+ E#onomi#! a! a !tudy of 1mean!2 and 1end!2, The mean! o e!ou#e! ae le!! in elation to thei demand, So it i! .no*n a!Sa#!t$ a!Sa#!t$ Def!n!t!on& A! pe %o--in! (i) Man ha! unlimited *ant!(ii)The man to !ati!fy human *ant! ae limited(iii)%e!ou#e! not only limited -ut h$ altenati$e u!e!(i$)Man ha! to ma.e a #hoi#e, M!#oeonm!s and Ma#oenom!s Mi#oe#onomi#! deal! *ith indi$idual!+ and fim! *hee a! ma#oe#onomi#! i! *ith the o$eall pefoman#e of the e#onomy, It! )o(n Ma$na#d Ke$nes+ Ke$nes+ pu-li#ly a -oo. Gene#al Gene#al T(eo#$ of Em%lo$ment" Inte#est and Mone$ 3 and ma.e it pu-li#, Ma#oe#onomi#! i! a -an#h of E#onomi#! that deal! *ith the pefoman#e+ !tu#tue and -eha$io of a national o eional e#onomy a! a *hole, It i! the !tudy of -eha$io and de#i!ion ma.in of entie e#onomi#!, It aeated indi#ato! !u#h a! D&+ unemployment ate! and pi#e indi#e! to unde!tand ho* the *hole e#onomy fun#tion!, fun#tion!, It de$elop de$elop model! that e4plain the elation!hip elation!hip amon !u#h fa#to! a! national national in#ome+ in#ome+ output+ output+ #on!umption+ #on!umption+ unemployment+ unemployment+ inflation+ inflation+ !a$in!+ !a$in!+ in$e!tment+ in$e!tment+ intenational intenational tade and intenational finan#e, T$%es of Eonom$ Ma#*et /Ca%!tal!st! /Ca%!tal!st! Eonom$5 Eonom$5 6hen Indi$idual! and &i$ate 'im! ma.e the ma7o de#i!ion! a-out podu#tion and #on!umption+ the o$enment doe! not intefee any e#onomi# de#i!ion!+ In the e4teme #a!e of Ma.et e#onomy *hee o$enment doe! not intefee i! al!o #alled 1Lai!!e89faie2 e#onomy,So!al!st!/Command e#onomy,So!al!st!/Command Eonom$+ In thi! o$enment ma.e! all the de#i!ion! a-out podu#tion and di!ti-ution, M!,ed Eonom$+ No #ontempoay !o#iety o e#onomy fall! #ompletely into eithe of the!e e4teme #ateoie!, All !o#ietie! ae mi4ed e#onomi#+ *ith element! of -oth ma.et and #ommand e#onomie!, Su%%l$ and Demand Supply and Demand i! a po*eful tool fo e4plainin the #hanin ma.et+ *hi#h ae dynami# li.e *eathe and !ho*! ho* #on!ume pefeen#e! detemine
#on!ume demand fo #ommoditie!+ *hile -u!ine!! #o!t! detemine the !upply of #ommoditie!, Demand S(edule "oth #ommon !en!e and #aeful !#ientifi# o-!e$ation !ho*! that the amount of a #ommodity people -uy depend! on it! pi#e, The hihe the pi#e of an ati#le+ othe thin! held #on!tant+ the fe*e unit! #on!ume! ae *illin to -uy, The lo*e i! it! ma.et pi#e+ the moe unit! of it ae -ouht, Thee e4i!t! a definite elation!hip -et*een the ma.et pi#e of a ood and the 0uantity demanded of that ood+ othe thin! held #on!tant, Thi! elation!hip that e4i!t! -et*een pi#e and 0uantity -ouht i! #alled the demand !#hedule+ o the demand #u$e, Demand Cu#-e The aphi#al epe!entation of demand !#hedule in demand #u$e, La. of Do.n.a#dslo%!n0 Demand 6hen the pi#e of a #ommodity i! ai!ed (and othe thin! -ein #on!tant)+ -uye! tend to -uy le!! of the #ommodity, Similaly+ *hen the pi#e i! lo*eed+ othe thin! -ein #on!tant+ 0uantity demanded in#ea!e!, :uantity demanded tend! to fall a! pi#e i!e! fo t*o ea!on!, 'i!t i! the !u-!titution effe#t, 'o in!tan#e+ *hen the pi#e of a pati#ula ood i!e!+ I *ill !u-!titute othe !imila ood! fo it (a! the pi#e of mutton i!e!+ I eat moe #hi#.en), Se#ond i! the in#ome effe#t, Thi! #ome! into play *hen a hihe pi#e edu#e! 0uantity demanded, "e#au!e *hen pi#e oe! up+ I find my!elf !ome*hat pooe than I *a! -efoe, If petol pi#e! dou-le+ I ha$e in effe#t le!! eal in#ome+ !o I *ill natually #u- my #on!umption of petol and othe ood!, T(e Ma#*et Demand+ It epe!ent! the !um total of all indi$idual demand!, It i! *hat o-!e$a-le in the eal *old, It i! found -y addin toethe the 0uantitie! demanded -y all indi$idual! at ea#h pi#e Su%%l$ S(edule It elate! the 0uantity !upplied of a ood to it! ma.et pi#e+ othe thin! -ein #on!tant, It !ho*! the elation!hip -et*een it! ma.et pi#e and the amount of that #ommodity that podu#e! ae *illin to podu#e and !ell+ othe thin! -ein #on!tant, T(e u%.a#dslo%!n0 met(od i! at the Supply S#hedule, E1u!l!2#!um of Su%%l$ and Demand The ma.et e0uili-ium (-alan#e) #ome! at that pi#e and 0uantity *hee the fo#e! of !upply and demand ae in -alan#e, At the e0uili-ium pi#e+ the amount that -uye! *ant to -uy i! 7u!t e0ual to the amount that !elle! *ant to !ell, The ea!on *e #all thi! e0uili-ium i! that+ *hen the fo#e! of !upply and demand ae n -alan#e+ thee i! no ea!on fo pi#e to i!e o fall+ a! lon a! othe thin! emain un#haned, A ma.et e0uili-ium #ome! at the pi#e at *hi#h 0uantity demanded e0ual! 0uantity !upplied, It i! al!o #alled ma#*etlea#!n0 %#!e& Mone$ Su%%l$ and Inflat!on Mone$+ Money+ *hi#h pefom! (i) Medium of E4#hane+ (ii) A mea!ue of ;alue (iii) A !toe of $alue o$e time (i$) Standad fo defeed payment!, Money !upply efe! to the !to#. of money in #i#ulation in the e#onomy at a i$en point of time, Thi! i! de#ided -y the o$enment and the #ental -an., It i! patly e4oenou! and patly endoenou!, The fou mo!t ommon measu#es of money !upply+ *hi#h ae u!ed in India+ ae a! follo*!5 Na##o. Mone$ 3M5
=Sa$in! M67M>=Sa$in! depo!it! of po!t offi#e !a$in! -an.!+ M83B#oad Mone$57M9Time Mone$57M9Time depo!it! *ith the -an.in !y!tem+M47 !y!tem+ M47M?=All M?=All depo!it! *ith po!t offi#e !a$in! -an.!(e4#ludin National Sa$in! Cetifi#ate!), Inflat!on It lead! to fall in pu#ha!in po*e, 6hen the pi#e le$el i!e!+ ea#h unit of #uen#y -uy! fe*e ood! and !e$i#e!, Causes of Inflat!on Demand:ull Inflat!on+ It Inflat!on+ It i! a i!e in eneal pi#e! #au!ed -y in#ea!in aeate demand fo ood! and !e$i#e!, Demand e4#eed! !upply @ then !hotae @ an in#ea!e in pi#e, Cost:us(+ It i! a type of inflation #au!ed -y !u-!tantial in#ea!e! in the #o!t of podu#tion of impotant ood! o !e$i#e! *hee no !uita-le altenati$e i! a$aila-le, Measu#es of Inflat!on Inflation denote! a i!e in the eneal le$el of pi#e!, It i! mea!ued -y a pi#e inde4, A pi#e inde4 i! a *eihted a$eae of the pi#e! of a !ele#ted -a!.et of ood! and !e$i#e! elati$e to thei pi#e! in !ome de!inated -a!e9yea, Inflation< (&i#e Inde4 in Cuent Yea9&i#e Inde4 in "a!e Yea) 4 >,T(e >,T(e !m%o#tant %#!e !nde,es a#e; 3!5 '(olesale :#!e Inde, It efle#t! the #hane in the le$el of po#e!! of a -a!.et of ood! at the *hole!ale le$el, It fo#u!e! on the pi#e of ood! taded -et*een #opoation! at the *hole!ale !tae+ athe than ood! -ouht -y #on!ume!, #on!ume!, In India 6&I 3 ISLM Cu#-e Model ? i! #alled IS and LM Cu$e!, Thouh dei$ation+ the IS #u$e fom the #la!!i#al theoy and L+M #u$e fom eyne!2! li0uidity pefeen#e theoy+, The IS #u$e tell! u! *hat *ill -e the $aiou! ate! of intee!t at diffeent le$el! of in#ome+ i$en the in$e!tment demand #u$e and family of !a$in #u$e! at diffeent le$el! of in#ome, On the othe hand+ fom eyne2! fomulation+ the LM #u$e i! o-tained fom a family of li0uidity pefeen#e #u$e! #oe!pondin to $aiou! in#ome le$el! toethe *ith the i$en !to#. of money !upply, The IS and LM #u$e elate the t*o $aia-le! (a) in#ome and (-) the ate of intee!t, Inte!e#tion point of the!e t*o #u$e! i! the e0uili-ium ate of intee!t, Bus!ness C$les "u!ine!! Cy#le !imply mean! the *hole #ou!e of -u!ine!! a#ti$ity *hi#h pa!!e! thouh the pha!e! of po!peity and depe!!ion, A -u!ine!! #y#le i! not a eula+ pedi#ta-le+ o epetiti$e phenomenon li.e the !*in of the pendulum of a #lo#., It! timin i! andom and+ to a lae deee+ unpedi#ta-le, It influen#e! -u!ine!! de#i!ion, It affe#t! not only the e#onomy in eneal+ -ut ea#h indi$idual -u!ine!! fim, C(a#ate#!st!s+ A C(a#ate#!st!s+ A -u!ine!! #y#le i! !yn#honi# (the fa#t of t*o o moe thin! happenin at e4a#tly the !ame time)+ A -u!ine!! #y#le !ho*! a *a$e9li.e mo$ement, The peiod of po!peity and depe!!ion #an -e altenati$ely !een in a #y#le, Cy#li#al flu#tuation! ae e#uin in natue, A -oom i! follo*ed -y depe!!ion and the depe!!ion aain i! follo*ed -y -oom, Fou# -oom, Fou# :(ases of a Bus!ness C$le+ 3!5 Boom + Duin the -oom pha!e+ podu#tion #apa#ity i! fully utili8ed and al!o podu#t! fet#h an a-o$e nomal pi#e *hi#h i$e! hihe pofit, Thi! atta#t! moe and moe in$e!to!, To manufa#tue moe num-e of podu#t! entepeneu pu#ha!e! ne* ma#hine! and al!o employee! *o. at hihe *ae ate, 3!!5 @eess!on+ On#e e#onomy ea#he! the peal the #ou!e #hane!, A do*n*ad tenden#y in demand i! o-!e$ed, "ut the podu#e! *ho ae not a*ae of thi! tend o on podu#in, The !upply no* e4#eed! demand, No* the podu#e! #ome to noti#e that thei !to#.! ae in#ea!in, The failue of one fim affe#t! othe fim! *ith *hom it ha! -u!ine!! #onne#tion!, Thi! pha!e of the -u!ine!! #y#le i! .no*n a! the #!s!s, #!s!s, 3!!!5 De%#ess!on+ Undeemployment of -oth men and mateial! i! a #haa#tei!ti# of thi! pha!e, &odu#e! ae #ompelled to !ell thei ood! at a pi#e *hi#h *ill not e$en #o$e the full #o!t, Manufa#tue! of -oth #apital ood! an #on!ume! ood! ae fo#ed to edu#e the $olume of podu#tion, A! a #on!e0uen#e+ *o.e! ae tho*n out+ The emainin *o.e! ae pooly paid 3!-5 @eo-e#$5 @eo-e#$5 Depe!!ion pha!e doe! not #ontinue indefinitely, The idle *o.e! no* #ome fo*ad to *o. at lo* *ae! and the e#onomi# a#ti$ity no* !tat! pi#.in up+ The depe!!ion pha!e then i$e! *ay to e#o$ey, Ind!an Eonom$ and Va#!ous Seto#s of Indian e#onomy i! #la!!ified #la!!ified in thee main !e#to! !e#to! @ Ai#ultue Ai#ultue and allied+ Indu!ty Indu!ty and Se$i#e!, Se$i#e!, Ai#ultue Ai#ultue in#lude! 'oe!ty and Loin+ Loin+ 'i!hin 'i!hin and t(e Eonom$ elated a#ti$itie!, Indu!ty !e#to in#lud e! Manufa#tuin+ Ele#ti#ity+ a!+ 6ate Supply and Con!tu#tion, Se$i#e! Se#to in#lude! Tade epai+ hotel! and e!tauant!+ tan!pot+ !toae+ #ommuni#ation and !e$i#e! elated to -oad#a!tin+ finan#ial + eal e!tate and pofe!!ional !e$i#e!+ #ommunity+ !o#ial and pe!onal !e$i#e!, Se$i#e! !e#to i! the lae!t !e#to of India, o!! ;alue Added at #uent pi#e! fo !e$i#e! !e#to i! e!timated at %!, F>,>G la.h #oe in H>,>J, The D& o*th *a! K,H in HJ9F+ K in HF9+ F, till >KG9G>, , in H9 G to G9K, M!#o and Small Ente#%#!ses+ The ma7o poli#ie! in ead to #edit deli$ey that #ollateal !hould not -e ta.en fo loan up to %!, Jla# to MSE unit! and po$idin #edit uaantee fo #ollateal fee loan! fom the Cedit uaantee Tu!t 'und admini!teed -y SID"I, The MSMED A#t HF(Mi#o+ Small and Medium Entepi!e! De$elopment A#t) #la!!ifie! -oadly into t*o #ateoie! (i) manufa#tuin (ii) !e$i#e entepi!e!, The!e -oad #ateoie! ae futhe #la!!ified into mi#o entepi!e!+ !mall entepi!e! and medium entepi!e!+ dependin upon the le$el of in$e!tment in plant and ma#hiney and e0uipment a! the #a!e may -e, The A#t al!o po$ide! fo #on!titution of a National "oad fo Mi#o+ Small and Medium Entepi!e! unde the #haiman!hip of the Union Mini!te fo MSME+ *ith *ide epe!entatio epe!entation n of !ta.eholde! !ta.eholde!,, St#utu#al St#utu#al C(an0es !n Ind!an Ind!an Eonom$+ Eonom$+ Duin the fi!t J yea! of the nineteenth #entuy+ the a$eae D& oth ate ha! -een 7u!t ,+ *hi#h pi#.ed up to ?,J (populaly #alled a! KG and it! a!!o#iated !u##e!! in po$ety edu#tion ai!ed #on#en! a-out the effi#a#y of India2! in*ad oiented !tatey, Eonom! T#ansfo#mat!on 'inan#ial !e#to efom! ha$e -een #aied out in a##odan#e *ith the e#ommendation! made -y -a!i#ally thee #ommittee!5 (a) Naa!imham Committee F!nan!al Seto# epot on finan#ial !e#to efom!(-) Naa!imhan #ommittee epot on -an.in !e#to efom! and (#) S,B, han epot of the *o.in oup fo hamoni8in
the ole and opeation! of De$elopment 'inan#ial In!titution! and -an.! %efom! in finan#ial !e#to #omplemented the eal !e#to de$elopment!, Mone$ Ma#*et+ %efom! in money ma.et *ee e!!entially aimed at po$idin a$enue! fo the ma.et playe! to deploy o a##e!! to !hot9tem fund! and a platfom to the monetay authoity to modulate li0uidity in the !y!tem, Go-e#nment Seu#!t!es Ma#*et+ It i! not no* a #apite ma.et, In$e!tment in 9Se# -y the -an.! i! -a!ed on thei #omme#ial 7udement athe than -ein di#tated -y the e!e$e e0uiement, A! a pat of efom!+ #on#e!!inay finan#in *a! aliminated *ith intodu#tion of ma.et au#tion !y!tem and pha!in out of automati# moneti8ation *ith 6ay! and Mean! Ad$an#e!, Moneta#$ :ol!$ It2!a po#e!! -y *h#h th o$enment+ #ental -an.+ monetay authoity of a #ounty #ontol (i)!upply of money(ii)a$aila-ility of money and (iii) #o!t of money Tool! of Monetay &oli#y5 Ban* @ate+It @ate+It i! the ate of intee!t *hi#h a #ental -an. #hae! on the loan! and ad$an#e! that it e4tend! to #omme#ial -an.! and othe finan#ial intemediaie!, Cas( @ese#-e @at!o+ It efe! to thi!i li0uid #!h that -an.! ha$e to maintain *ith the %e!e$e "an. of India a! a #etain pe#entae of thei net demand and time lia-ilitie!, SL@+ It efe! to the amount that all -an! e0uie maintain in #a!h o in the fom of old o appo$ed !e#uitie!, MSS(Ma#*et MSS(Ma#*et Sta2!l!sat!on S(eme5 @e%o @ate+ It i! the ate at *hi#h the %"I lend! !hot9tem money to the -an.!, @e-e#se @e%o @ate+ It i! the ate at *hi#h -an.! pa. thei !hot9tem e4#e!! li0uidity *ith the %"I, OMO 3O%en Ma#*et O%e#at!on" *hee the %"I -uy! o !ell! o$enment -ond! in the !e#onday ma.et, F!sal :ol!$ It i! the u!e of o$enment !pendin and e$enue #olle#tion to influen#e the e#onomy, The t*o main in!tument! of fi!#al poli#y ae o$enment !pendin and Ta4ation, F@BM At+ 'i!#al %e!pon!i-ility and "udet Manaement A#t headed -y M, E,A,S, Sama *hi#h ena#ted a! La* in Auu!t H?, It ha! fou main e0uiement!, (i)It e0uie! the o$enment to pla#e -efoe &aliament thee !tatement! *a#h yea alon *ith the "udet, (ii) The a#t lay! do*n fi!#al manaement pin#iple!, Ma.in it in#um-ent on the #ente (iii) In t! mo!t !tinent po$i!ion+ it pohi-it! the #ente fom -oo*in fom the %e!e$e "an. ofIndia9that i!+ it -an! 1defi#it finan#in2 thouh money #eation, (i$) The finan#e mini!te i! e0uied to .eep paliament infomed thouh 0uately e$ie! on the implementation+ and to ta.e #oe#ti$e mea!ue! if the e$ie*! !ho de$iation!,
GD: Cone%ts It i! the total ma.et $alue of all the final ood! and !e$i#e podu#e! *ithin the teitoial -ounday of a #ounty+ u!in dome!ti# e!ou#e!+ duin a i$en peiod of time+ u!ually one yea, G#oss Nat!onal Inome at Ma#*et :#!es7 D& at ma.et pi#e! = ta4e! le!! !u-!idie! on podu#tion and impot!=Compen!aion of Emplyee!=&opety In#ome, G#oss Nat!onal :#odut 3GN:5 7 GD:9 Net Inome @ee!%ts& Def!!t Cone%ts @e-enue defi#it i! the e4#e!! of e$enue e4penditue o$e e$enue e#eipt!, G#oss F!sal Def!!t+ i! the e4#e!! fo total e4penditue in#ludin loan!+ net of e#o$eie! o$e e$enue %e#eipt! and non9de-t e#eipt!, Net F!sal Def!!t i! the diffeen#e -et*een o!! fi!#al defi#it and net lendin, G#oss :#!ma#$ Def!!t i! the diffeen#e -et*een the o!! fi!#al defi#it and intee!t payment!, Net %#!ma#$ def!!t denote! net fi!#al defi#it minu! net intee!t payment!,
