Assignment Code: BECC-113/AST/TMA/2022-23

Course Code: BECC-113

Assignment Name: INDIAN ECONOMY II

Year: 2022-2023

Verification Status: Verified by Professor

Maximum Marks: 100

Answer all the questions

A. Long Answer Questions (word limit-500 words) 2 × 20 = 40 marks

1) Explain the different instruments of Monetary Policy.

Ans) The RBI oversees India's entire banking industry, including the money market. As a result, it has the power to implement specific quantitative and qualitative measures in order to control the money supply. Quantitative measures are used to control the ability of banks to create credit, while qualitative measures are used to direct credit flow to the desired economic sectors (called priority lending policy). By emphasising that the RBI should work toward the establishment of new monetary and financial institutions for the orderly development of the Indian money market, in addition to its previously assumed roles (i.e., striving for achieving price stability, economic growth, equity, and social justice), the Sukhmoy Chakrawarti Committee gave the role of the RBI a new dimension. As a result, this was added as the fifth goal of the RBI's monetary macroeconomic role.

Reserve Ratios

The "cash reserve ratio" (CRR) is a significant and vital tool used by the RBI to control the amount of money in circulation. Banks are required to keep a specific percentage of their total deposits with the RBI in the form of liquid cash under the policy of cash reserve requirements. All banks, including scheduled commercial banks, non-scheduled banks, cooperative banks, and regional rural banks, are required to comply with CRR requirements. CRR has a very strong direct impact on the banks' ability to lend money. Banks that don't adhere to the CRR standards are subject to a penalty interest rate from the RBI. The deposit multiplier (D) value is the inverse of the CRR, as shown in equation (1.3) above (x). Therefore, if CRR is 20%, the deposit multiplier has a value of 5.

Bank Rate

The bank rate is the price at which the RBI redeems (buys back) promissory notes and bills of exchange. Additionally, it refers to how frequently loans and advances are given to banks (including state finance corporations (SFCs), cooperative banks, and SCBs). Thus, it can be thought of as a rate of interest at which the RBI provides loans and advances to banks and other financial institutions.

Even though the interest rate is primarily designed to cover the cost of borrowing money, it is calibrated to control the money supply. Banks and other financial institutions raise their lending rates in response to RBI increases in the bank rate. As a result, there is a decline in the demand for loans and advances. As a result, the economy's money supply declines due to less credit money.

Repo and Reverse Repo Rates

Repo rate is the rate at which the RBI lends money to commercial banks when they run out of cash. Thus, it is an RBI short-term lending rate. The repo rate is a tool for short-term inflation control. The repo rate is frequently changed by RBI to reduce inflation. The cost of lending to banks is increased by the RBI by raising the repo rate.

The opposite of repo rate is called reverse repo rate (RRR). RRR is the interest rate at which the Reserve Bank of India borrows money from commercial banks to eliminate excess cash on hand. It is the RBI's short-term borrowing rate. To regulate the money supply, RBI frequently modifies the RRR. The RBI encourages commercial banks to contribute their excess funds to it by raising the reverse repo rate. This decreases the amount of money that is available to the banks, which limits their ability to extend credit and, as a result, decreases the amount of money available to the economy.

2) Discuss the policy initiatives of India during the period 2015-2020 for improving the sectoral performance of the economy.

Ans) We had taken note of the proportional employment shares by major industries. Table 13.1 is a new presentation of the information found there. India's employment in the agricultural sector increased from 42.5 percent in 2017–18 to 44.1 percent in 2018–19. This increase, which has been on a long-term downward trend, indicates that non-agricultural employment prospects have been declining over the past two years. The proportion of agriculture in the GDP is also falling. This is a one percentage point difference (from 18.3 percent in 2017 to 17.3 percent in 2019).

Agriculture Sector

A comprehensive umbrella programme to "double the farmer's income" (DFI) by 2022–2023 was unveiled by the government in 2016. A multi-dimensional, seven-point action plan aims to achieve this by emphasising the following: (i) irrigation with a focus on an end-to-end resource creation strategy to realise "more crop per drop," (ii) provision of high-quality seeds and nutrients based on tested soil quality, (iii) investment in warehouses and cold chains to prevent post-harvest losses, (iv) promotion of value addition through food processing, and (v) implementation of the "national agricultural mark."

In 2015, the Pradhan Mantri Kisan Sinchayee Yojana (PMKSY) programme is introduced. A different programme known as the PMFBY (Pradhan Mantri Fasal Bima Yojana), which was introduced in 2016, supplements this.

Industries Sector

The MSME sector is the primary area of focus for this discussion of policy. Different criteria are used to define MSME, including the number of hired employees and annual revenue. Here, we look at the MSME unit definition based on the annual dollar turnover. Periodically, the monetary ceiling is increased. According to the current definition (2021), a "micro enterprise" is defined as an industrial unit with an annual turnover of less than 5 crore rupees. Small businesses are those making between 5 and 75 crore rupees, while medium businesses are those making between 75 and 250 crore rupees.

As a result, the capital used therein is sufficient to support a trained skilled workforce from institutions like ITIs and polytechnics. In August 2019, the government released a roadmap for MSMEs. Accordingly, the government aims to increase the MSME's contribution to the GDP from the current level of about 29 percent to 50 percent by 2024. The suggested actions include I develop new funding avenues; (ii) making the industry investor-friendly; (iii) fostering technological advancements; (iv) lowering logistics costs to make MSME products competitive; (v) providing adequate skilling and market support, etc.

Services Sector

The services sector includes a vast array of activities that fall outside of the primary (natural resources-related, such as mining and agriculture) and secondary (manufacturing, water, electricity, gas, and construction) sectors. Trade, hospitality (hotels and restaurants), tourism, communications, transportation, banking and finance, insurance, information technology, real estate, law and order, the judicial system, and personal services are all included (e.g., maids, nurses). Over 50% of India's GDP is made up of the services sector. This percentage varies from year to year and reached 60% (59.9%) in 2013–14. (At 2004-05 prices). The services sector will contribute 54.3% of GVA in 2020–21. (Advance estimates).

B. Medium Answer Questions (word limit-250 words) 3 × 10= 30 marks

3) Outline the two major types of fiscal policy along with its implications.

Ans) Expansionary fiscal policy aims to either raise government spending or lower tax rates (or a combination of both) in order to increase the economy's overall demand. It is particularly utilised during economic downturns. However, because expansionary fiscal policy raises interest rates, it has the effect of decreasing private investment. When there is high inflation, contractionary fiscal policy aims to reduce government spending, raise taxes, or do both at once to reduce aggregate demand in an economy.

Y =C+ b (Y- tY) + TR+1+G+NX

Where Y = GDP, C = autonomous/subsistence consumption, b = marginal propensity to consume (C/Y), (Y—tY) is disposable income or induced consumption, TR is "transferred funds" (i.e., money that goes from the federal government to state governments as a result of the states' share of federal revenue, grants in aid, etc.), I is investment, G is government spending, and NX is net export. The effects of any change in fiscal policy on all the elements represented in Equation (2.1) above have a significant impact on the government's budget. Expansive fiscal policy typically leaves the government with a fiscal deficit. In this case, the government's revenue is less than its outlay.

Implications of Fiscal Policy

Through shifting levels of economic activity that are responsive to changes in interest rates, tax policies have an impact on the level of aggregate demand. In addition to lowering aggregate demand, higher taxes also result in a decline in private investment, which lowers the level of economic activity. Additionally, it affects the amount spent by the government on the social sector. Some nations experience increases in government spending that are unable to be covered by tax revenues (or other sources of government income). Government is compelled to borrow money from the market in these circumstances. Due to these borrowings, it must invest resources in debt servicing. Fiscal policy also has important political ramifications in addition to these economic ones.

4) Indicate the importance of agricultural sector in stimulating the overall economic growth of an economy.

Ans) The percentage of India's GDP that comes from the agricultural sector has steadily decreased, from 53% in 1951 to just over 14% in 2014. As a result, between the years of 1951 and 2014, the shares of the industries and services sectors rose from 17% to 26% and from 30% to 60%, respectively. The primary factors contributing to the decline in the agricultural sector's share of the overall GDP are: (i) conventional farming methods; (11) reliance on the monsoon; (iii) small landholdings; (iv) low productivity; (v) reduced subsidies in the 1990s following reform; (vi) low farmer skill levels; (vii) insufficient investment in the infrastructure required to improve the performance of the agricultural sector; (viii) price volatility, etc.

The growth rates of the GDP measured at constant prices can be another way to examine the relative performance of the three different sectors. According to statistics, between 1951 and 2011, the primary sector grew at an average annual rate of 2.8 percent, while the secondary and tertiary sectors both experienced annual growth rates of 6 percent (Sen & Dreze, 2013). Therefore, the decline in the agricultural sector's contribution to GDP is not only attributable to its own slow growth but also to the relative faster growth of secondary and tertiary sectors.

Despite a decline in the contribution of agriculture to India's overall GDP, food production increased by nearly 6 times between 1951 and 2018. In particular, it increased from about 285 million tonnes (MT) in 2017–18 to 51 million tonnes (MT) in 1951. Milk production increased more than ten times (from 17 MT to 176 MT) between 1951 and 2018, and fish production increased more than ten times (from 0.8 MT to 8 MT) between 1951 and 2012. Approximately 2 billion eggs were produced in 1951, and 95 billion eggs were produced in 2018. 

5) Analyse the trend in the industrial performance of India during the post-1991 phase.

Ans) Due to the 1990s balance of payments crisis, output decreased in 1991–1992, but then surged for four years, reaching its peak in 1995–1996. After that, there was a seven-year period of sharp deceleration before 2002–2003. From 2003–2004 to 2007–2008, a second boom lasted for a further four years. Consumer durables experienced the fastest growth between 1992 and 2010 (19 years, or 9.3 percent per year), followed by capital goods at 8.1 percent per year. The service sector saw significant growth in the Indian economy after the reforms, increasing its share of GDP from 44 percent in 1991–1992 to 57 percent in 2009–2010.

The industrial sector's share increased slightly from 23 percent in 1991–1992 to 26 percent in 2009–2010 during the same time period, while the agricultural sector's share fell from 33 percent to 17 percent. Industrial growth, which was only 1% in 1991–1992, began to pick up in 1993–1994 and reached a high of 13% in 1995–1996 before falling back to 5.5 percent in 1998–2000. Despite these sporadic ups and downs, the overall growth of Indian industries over the ten-year period from 1995 to 2005 and the ensuing seven-year period from 2005 to 2013 has been a consistent 6.8 percent annual growth.

However, with easier imports and entry of new firms, the reforms during the succeeding years have increased the effective competition in the domestic market. Fixed investments are now more productive due to the relative price of capital goods declining. This suggests that a buyers' market for industrial goods has developed, with these goods' quality, variety, and after-sales service all improving. A rise in production efficiency has made it easier to compete with China.

C. Short Answer Questions (word limit 100 words) 2 × 3 × 5 = 30 marks

6) Differentiate between:

(a) Micro & Tiny Enterprises and Small Enterprises.

Ans) According to the Indian finance ministry's revision of the MSME definitions (effective July 1, 2020), micro enterprises are the small, ubiquitous businesses that operate all around us, with investments up to one crore and annual revenues under five crores. Micro Enterprises are present all around us, whether they are tiny cafes, neighbourhood grocery stores, or ice cream shops.

Small businesses are limited to having a turnover of up to 50 crores and an income between one and ten crores. These sectors do not generate a lot of revenue and only employ a small number of people. A successful restaurant, a small manufacturing facility, or even a small bakery are a few examples of everyday small businesses.

(b) Repo Rate and Reverse Repo Rate.

Ans) Repo rate is the rate at which the RBI lends money to commercial banks when they run out of cash. Thus, it is an RBI short-term lending rate. The repo rate is a tool for short-term inflation control. The repo rate is frequently changed by RBI to reduce inflation. The cost of lending to banks is increased by the RBI by raising the repo rate. The opposite of repo rate is called reverse repo rate (RRR). RRR is the interest rate at which the Reserve Bank of India borrows money from commercial banks to eliminate excess cash on hand. It is the RBI's short-term borrowing rate. To regulate the money supply, RBI frequently modifies the RRR. The RBI encourages commercial banks to contribute their excess funds to it by raising the reverse repo rate. This decreases the amount of money that is available to the banks, which limits their ability to extend credit and, as a result, decreases the amount of money available to the economy.

(c) Fiscal Deficit and Revenue Deficit.

Ans) Trends in India's revenue collections and revenue deficit from 2014–15 to 2018–19. It also displays the trends in the fiscal deficit in that light. Over the years 2016–17 to 2018–19, revenue receipts, which have typically ranged between 8 and 9 percent of GDP, have been falling. The main reason for this is the initial challenges with adjusting to the new GST regime. With the intention of establishing a financial discipline in the economy, the FRBM Act of 2003 was passed. Additionally, it was designed to provide the central bank (the RBI) with the necessary flexibility to combat inflation. The Act established a 3 percent GDP cap on the fiscal deficit, which had to be met by 2007–08.

7) Write short notes on the following.

(a) Export Led Growth.

Ans) ELG is an economic development strategy that places a strong emphasis on taking advantage of a nation's actual or potential comparative advantage in producing goods for markets abroad. To put it another way, ELG is an economic and trade policy that, in contrast to ISI, aims to hasten the industrialization of a nation by encouraging export of goods for which it has a comparative advantage. Given that it is "outward looking" and ISI is "inward looking," they are contrasted with one another. The 1960s saw the rise of modern export-led growth strategies as several East Asian nations abandoned the ISI strategy and started to encourage the export of manufactured goods.

(b) Multilateralism.

Ans) The agreements for advancing international trade and development are known as multilateralism or multilateral trade agreements. They were established with non-discrimination as their guiding principle. The World Trade Organization's rules and regulations serve as their guide (WTO). Agriculture, cotton, and issues relating to least developed countries have been the main topics of Ministerial Decisions under WTO at various Conferences (LDCs).

These include public stockholding for the purpose of ensuring food security, the Special Safeguard Mechanism (SSM) for developing nations, the promise to end export subsidies for farm exports to developed nations, and cotton-related measures. The criteria for determining how exports from LDCs can be advantageous to them and decisions on preferential treatment for LDCs in the area of services are also made in the WTO.

(c) Organised Sector Unit.

Ans) Social security is regarded as a component of labour law in India. (1) The Workmen's Compensation Act (WCA) 1923; (11) The Employees' State Insurance Act (ESIA) 1948; (iii) The Employee' Provident Funds (and Miscellaneous Provisions) Act (EPFA) 1952 [including the Employees’ Pension Scheme (EPS) 1995]; (iv) The Maternity Benefit Act (MBA) 1961; and (v) The Payment of Gratuity Act (PGA) 1972. These are the main social security laws that have been

In the event of an accident or injury occurring during the course of employment that results in disability or death, as well as in the case of certain occupational diseases, the Act provides for payment of compensation to workers and their dependents.