Download GDP- (GROSS DOMESTIC PRODUCT)

 GDP- (GROSS DOMESTIC PRODUCT)-means ‘money value of everything produced in the country’
1 inside the country
2 both goods + services
 GNP (GROSS NATIONAL PRODUCT) - means GDP plus money value of things produced by Indians abroad
minus money value of things produced by foreigners in India. it is equal to GDP + ANIL KAPOOR – GARY
KIRSTEN
 METHODS OF CALCULATING GDP:-1 EXPENDITURE METHOD , 2 INCOME METHOD ,3
PRODUCTION METHOD
1- EXPENDITURE METHOD-consumption by private citizens plus people’s investment in share market and
banks plus all government spending plus money received from export minus money spent on imports.
Note :- second hand product money value is not added; agent money is added.
2- INCOME METHOD- all income is added (difficult to account for credit and delays)
3- PRODUCTION METHOD – total money value of everything produced (value added at each
stage).wheat(2500)+flour(3500)+bread( 3500)not equal to 8000, but 2000+500+1000=3500
 GDP @market price = GDP @factor cost + indirect taxes-subsidies
 GDP @factor cost= GDP @ market price –indirect taxes +subsidies
SUBSIDY=
Subsidy on Urea ; tax = tax on DVD’S etc.
 NET NATIONAL PRODUCT =gross national product minus depreciation
 GDP deflator =
Nominal GDP (@ CURRENT price)
 100
Real GDP (@ base year price)
GDP deflator >100 means inflation
 GDP(nominal ) = GDP IN RUPEES/OFFICIAL EXCHANGE RATE; in PPP=basket of commodities
GDP (purchasing power parity) = GDP (in rupees) / PPP exchange rate for rupees
 Capital goods:- tools, machines for production ,also called producer goods. Raw material not included
 Capital gains:- profit made by selling capital assets
For Eg: Land, machinery, shares, debentures, mutual funds, jewellery etc
(CGT) CAPITAL GAINS TAX is a direct tax, charged on income and property keeping assets for less time(short
term CGT), for long term (LONG TEM CGT)
 MONETARY AND FISCAL POLICY:
1- RBI makes monetary policy to control inflation and control the supply of money in the banking system .the
tools used are repo, reverse repo, bank rate ,SLR etc..
When bank charge high rate of interest on loan- dear money policy
When bank charge low rates of interest on loan- cheap money policy
2- Government makes fiscal policy, tools used are taxation and public expenditure, its intention is to
redistribute income. The two policy are inter-dependent
 RBI :- The central bank plays two roles:1. Money supply controller 2. Govt. debt manager
To banks, it is the lenders of last resort
 Banking rates:- liquidity is a relative term. 1 crore worth gold is more liquid than 1 crore worth land. both very
high and very low liquidity are bad. RBI has 4 tools to keep liquidity in check
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1. Cash reserve rate(CRR)
2. Statuary liquidity ratio (SLR)
3. LIQUIDITY ADJUSTMENT FACILITY (LAF) - REPO AND REVERSE REPO
4. Open market operations (OMO)
1. CRR:– The small % of money that banks have to compulsorily keep with RBI , on which tey get interest.(used
to).
2. SLR:- A Considerable percentage of money that banks invest in safe investments like govt. securities, gold,
RBI rated corporate bonds. Most banks invest in govt. securities(preferred)
3. LAF:– (i) Reverse repo: It is the interest rate paid by RBI to its clients for short-term loans. Clients include govt., state
govt., banks (commercial, RRB, cooperative), NBFCs
(ii) Repo Rate: It is the rate RBI charges from its clients from short-term loans. It is tied to Reverse Repo
(since 2011), always 100 basis points higher than Reverse Repo Rate.
(iii) Bank Rate is the rate at which RBI lends money for long term.
(iv) MSF (Marginal Standing Facility): 100 basis points higher than repo rate. Only for scheduled
commercial banks. Here, banks can sell from their SLR quota (while LAF)
4. Open Market Operations (OMO):-It is when RBI busy or sells securities in open market. In LAF, RBI and
banks exchange G-secs temporarily, here in OMO, G-secs are permanently sold.
Money Supply: CASA stands for Current Account Savings Account. The other deposits banks get are from Fixed
Deposits(FD).Profit margins for bank is higher in CASA as compared to FD because interest rate on offer are much
lower (0% for CA,4% for SA) whereas it is around 8-9% for FD. Most banks keep a high CASA: FD ratio. It can
occasionally get risky.
How much money is in circulation in the market needs to be regularly checked and regulated.M0, M1, M2,
M3, M4 are different types of money supply measures, calculated by RBI, used as Indicators.
M0 = reserve money, M1 = readily accessible for spending, M2 = key to forecast Inflation, M3 = broad money (M1
+ Time deposits), M4 = M3 + Post office deposit – NSC.
Types of Banks:–
1. Commercial Banks:- Major financial intermediaries, collect deposits from savers and loan it to borrowers;
earning commission in between. They have to deposit some money as SLR into G-secs and RBI rated
corporate bonds. Both deposit rates and lending rates have been deregulated for exporters, foreign accounts
and domestic deposits. Domestic lending varies with varying repo rates.
2. Regional Rural Banks: Much smaller than commercial banks in terms of area of operation. Narsimhan
committee mooted the idea in late 70s.They are sponsored by commercial banks. Paid up capital ratio for
central govt : state govt : sponsored bank is 50:15:35.These loans are given to farmer(small, marginal),
agriculture labour, rural artisans, cooperative society etc. They borrow from NABARD,SIDBI etc too
3. Development Banks:- Different for different sectors. NABARD for agriculture, National Housing Bank for
housing: SIDBI, IDBI, ICICI, IFCI, IIBI for industry .EXIM Bank for export and import. These banks don’t
accept deposits from public. They provide medium or long-term loans, not short term. They directly give
loan to companies, buy shares and bonds of a company, also underwrite new IPOs
Capital Adequacy Ratio is bank’s ability to absorb losses. Equal to bank’s assets divided by bank’s risky
assets
 Priority Sector Lending : Some sectors and communities are prioritized. Sectors are : agriculture, small
medium enterprises (SME),road and water transport, retail trade, small business, small housing loans (< 10
lakh),software industries, SHGs, agro-processing industries, distressed artisans, weaker sections SCs, STs,
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Muslims, Christians, Sikhs, Buddhists, Parsis. Plus expert credit, renewable energy, social infrastructure.
PS banks have to reserve 40% minimum loans for these.
 BASEL III Norms: It’s a safeguard/backup plan for banking sector. It provides details about how much money
a bank should keep aside to deal with financial crisis. Tier I capital is liquid, like currency, gold stocks, Tier II
capital is not liquid, Eg: land. India is a signatory.
Inflation: It is general rise in price of goods and services. There are two major theories for inflation:
1. Demand Pull(Demand Side)
2. Cost Pull(Supply Side)
1. Demand Pull Inflation:- This is the monetary type of inflation. Happens when people have too much money
but enough goods aren’t there
The reason for demand pull inflation are:a) Black money
b) Benami Transactions
c) Money lenders (not institutional)
d) Increase in disposable income due to dearness allowance, RBI’s monetary policy etc.
2. Cost Push Inflation:- This is the supply side inflation. It means cost of production has increased and hence
price of products has gone up. Factors responsible are :
a) Increased wages
b) Increase in tax (like excise duty, custom duty)
c) Reduced availability of raw materials when produces want a higher profit margin etc
There is also a third type which is a mixture of Demand Pull and Cost Push, called Mixed Double Pull Cost
Push Inflation.
Normal inflation is healthy, of about 2-3%
3-7% inflation is mild, but considerable
Hyper Inflation is when inflation rates are very high, out of control
Stagflation means both inflation and unemployment rates are very high.
WPI- Wholesale price index complied by office of Economic Adviser –Ministry of Commerce and Industry.
Does not cover services. Calculated using Laspeyres formula. Items are classified into three categories
1 – Primary articles [food etc.]
2-fuel, power, light etc.
3- Manufactured products
All these have different weightage in 2011 which was 22:14:63
CPI- Consumes price Indian earlier it was divided into four uletyper now only three.
1- Entire urban population
2- entire usual population
3-urban + Rural [ Consolidate (some above two)
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CPI is prepared by central statistical organization (CSO) of Ministry of Statistics and Programme implementation.
CPI includes Servies. It has gradually become more important than WPI.
CURRENCY DEVALUATION
Before 1966, 1$=RS 4.76
In 1966 , rupee devalued for first time 1$= Rs 7.50
This was the fixed sate system, also called pegged currency or Bretton Woods system. This system was abandoned
by most countries in 1973. India followed in 1975 and moved to a floating rate system. Here market price
determines the exchange rate. But till 1991 this hoarding rate was pegged to a bracket of currencies (of major
trading pastiness) after LPG reform of 1991 exchange rate was completely deregulated.
1. Devaluation currencies exports and decrease exports
2. It given a price advantage to exporting countries
3. Helps during BOP exists.
FINANCE
To start a new company, there are 4 essential requirements:
1. Land
2. Labour
3. Capital
4. Entrepreneurship
These four together are called factors of production
It is difficult to arrange for the necessary finance, and banks are often inadequate; hence the need for borrowing
from other sources. The two major ways to finance are:
1. Debt (to borrow money)
2. Equity (give partnership)
Finance
Debt (debenture)
Equity (share, IPO, stock)
1. a. Junk Bond
1. IPO (share)
b. Gilt Edged
2. Bank Loans
2. Venture Capitalist
3. Angel Funds
1. Debt: Write on a piece of paper “To whoever pays me Rs.1000, I’ll pay surreal 10% interest, and will repay the
principal after 5 years. Junk bonds are C or D rated (low creditworthiness), they promise bumper interest, are risky.
Gilt Edged are AA or high rated, offer low interest rate, very safe. That piece of paper is called Debenture. The
nomenclature, tax and interests also vary. Govt (central + state) and PSUs offer bonds, private companies issue
debenture. The former have lower stamp duty and lower interest rate in comparison with the latter.
2. Equity: Instead of loan, if someone offers partnership, It is called Equity. If a company has 30 lakh and needs 70
lakh, it brings out shares worth shares for 70,00,000 (for example 7 lakh shares of Rs 10 each).This security paper
one receives in return is called a share.
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IPO or Initial Public Offer is the first time this paper is sold, when it is resold it becomes ‘share’. The net worth of
shares is called STOCK. If one has 100 shares of Rs 20 each, his net stock worth is Rs 2000.
Primary Market is where IPOs are sold. Both happen in BSE etc. Shareholders have a stake in company; a Board of
Directors is constituted. There is not complete ownership of company.
Companies must keep their debt: Equity rates low to ensure high creditworthiness (from credit rating agencies like
CRISIL,S & P etc)
SECURITIES:
If in the govt and my expenses are more than my income, I’m in deficit. The best option for the govt is not to raise
taxes, print money or borrow from abroad, cent to raise money from Indians. So the govt. issues securities (usually
for short-term deficits).Govt gives a piece of paper(G Sec) and promises 4-5% return within 3-6 months. These are
Gilt Edged securities, sold by govt in primary market and security holders is secondary market.
Financial Market:
It consists of
1. Money market(for short-term money)
2. Capital Market ( for long term money)
Capital Market has two types:
i) Primary Market(where new securities are issued)
ii) Secondary Market(where securities are resold and purchased);commonly called Share Market
The problem with Capital Market is that more than 50% of money invested here is from FIIs, i.e., It is Hot
Money. Comes and goes too rapidly, creating stock rises and falls. Indians are wary of investing here, they
prefer Gold or FDs. This has many ramifications in the form of fluctuations, BOP crisis etc.
SEBI (Securities and Exchange Board of India):
It regulates both primary and secondary market. It protects the interest of investors in securities. It promotes
development of secondary market. It was established in 1998 but given statutory powers in 1992.
So RBI issues G-Secs. MOF decides how much G-secs needs to be issued, and SEBI protects and regulates the
Securities Market.
Types of Companies:
Paid up Capital is the amount of money contributed by equity (share holders)
1. Private Company:- minimum paid of capital of Rs 1 Lakh. Needs minimum 2 members and maximum
50(shareholders).Used Private Limited (Pvt Ltd).Cannot borrow from general public
2. Public Company:- minimum paid up Capital of Rs 5 Lakh. Requires minimum 7 members to start a public
company. Has to hold annual meeting of shareholders. Can borrow from general public via IPOs and Bonds
Eg of private company – Balaji Telefilms, Flipkart started as private Ltd
Eg of Public Company- Infosys currently is a public company
3. Departmental Undertakings:- Like Railways and Postal Department. Not registered under Companies Act,
directly audited by CAG. Employees are govt servants. RTI applies to them
4. Government Company:- Like ONGC,SAIL. Govt has minimum 51% paid up capital share. Govt=Union or
State. Managed by Board of Directors. Can borrow money via IPOs, bonds. Don’t require parliament approval
for financial matters. Not directly audited by CAG.RTI applies to them
5. Public Corporation:- established by a Special Act of Parliament or LA. Eg: LIC, Air India, IDBI, UTI. They
are wholly financed by govt but can borrow from public via bonds, shares. Don’t need Parliament approval.
Directly audited by CAG.RTI applies to them
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6. PSU(Public Sectors Undertaking):- It’s a public corporation PLUS a govt company. Departmental
undertakings are not PSUs
SENSEX: Sensitivity Index.
Base Year of 1st April 1979
Free floating market capitalization of 30 companies (total shares X piece of each share) divided by same number
from 1979 gives the Sensex.
Dollex is the dollar version of Sensex.
NIFTY is calculated on 50 chosen companies instead of 30.
BSE 100 or Bombay Stock Exchange does it for 100 companies
CREDIT RATING
A credit rating agency assigns credit ratings to issuers of bonds and securities: companies, govt etc. One can know
of creditworthiness of a company through them.
Eg: Standard & Poors (USA), CRISIL (India).S & P does from AAA to D.Credit Information Bureau of India
Limited(CIBIL) is a central agency that prepares reports on borrowers(past records etc)
Financial Intermediaries
Eg: banks, insurance companies, mutual funds, pension funds.
They exist so that local moneylenders don’t charge obnoxious interest rates (30-40%).Apart from the
aforementioned private borrowers and govt are also financial intermediaries (borrowers).
Eg: Commercial Bank (SBI, ICICI); Regional Rural Banks, Co-operative banks; Development
banks(IDBI,NABARD,NHB);Pension/Provident fund(NPS,EPFO);Mutual Fund(UTI etc);Insurance
Companies(LIC etc);and NBFCs (Non Banking Financial Companies like Mannapuram Gold, Muthoot Finance)

IRDA (Insurance Regulatory Development Authority),since 2000.Insurance Companies must register with IRDA

PFRDA (Pension Fund Regulatory and Development Authority),since 2003 Regulates pension sector of India
Mutual Fund: They accept money from common people and invest in shares and bond market. Give back profits
after keeping their shares. It’s a professionally managed collective investment scheme.
Provident Fund: Here employees constitute to a provident scheme providing returns from POV of employees
ARC (Asset Reconstruction Company): They buy NPAs or Non Performing Assets from banks and try to extract
maximum profit from them. They must register with RBI.ARCIL is India’s first and largest ARC.
SARFAESI Act: law for securitization, reconstruction for financial assets. Replaced Debt Recovery Tribunals
(partially).Gives banks power to auction mortgaged/secured assets
Credit Crunch: Reduction in the general availability of loans (credit) or a sudden tightening of conditions. If
credit crunch continues for a long time, it may lead to recession, unemployment rise.
Insider trading is often responsible for credit crunch
P-Notes (Participatory Notes): They are virtual certificates or paper that endow foreign investors with securities
and bonds without directly purchasing them. It is done via local mutual funds and investment banks, where profits
are transferred after putting aside one’s share.
They are often responsible for volatility in share market
Demat Account: when one purchases shares, one doesn’t get paper certificate, but are electronically transferred to
the Demat account (dematerialized or virtual)
Risks are, thereby, lowered, of theft, delay of transfer etc.
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