Assignment Code: BECE-146/AST/TMA/2022-23

Course Code: BECE-146

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 (1980) gave the role of the RBI a new dimension.

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 impact of recent domestic policies and continued constraints faced by services sector in India.

Ans) There are three types of domestic regulations: I technical standards; (ii) qualification standards; and (iii) licencing requirements and procedures. We list the main domestic regulations in place for the Indian services sector here because they serve the same purpose as tariffs in regulating services.

Transport Services

The movement of goods between states and problems with departmental coordination are restricted. The Multimodal Transportation of Goods Act, 1993, needs to be amended in the case of multimodal transportation.

Construction, Engineering and Related Services

Minimum capitalization standards, minimum area standards, and repatriation are all subject to limitations. A general umbrella (protection) clause is additionally imposed by a state, municipal, or local body. This safeguards the host nation's commitments or investments made in exchange for foreign investment. Urban Land Ceiling and Regulation Act Restrictions: The Act forbids construction services companies in India from utilising economies of scale and restricts their ability to operate on a small scale.

Healthcare Services

Healthcare services provided by foreign nationals are subject to limitations. Although there is no limit on FDI in the healthcare sector, foreigners are not allowed to offer services for profit, and their operations must be registered with the Indian Medical/Dental/Nursing councils.

Accountancy Services

In addition to FDI being prohibited in this industry, foreign service providers are not permitted to perform statutory audits of businesses. Additionally, given the potential for exporting these in the form of outsourcing, using the logos of accounting firms to facilitate alliances and enter foreign markets is prohibited.

Legal Services

Foreign direct investment is not allowed in the legal sector, and foreign law firms are not permitted to advertise or establish offices in India. Foreign service providers are not permitted to serve as partners, sign legal documents, or act as clients' representatives.

Education Services

Numerous controls and regulations are imposed by the federal, state, and statutory bodies because education is included in India's concurrent list. There is a need for regulations regarding the establishment of new medical colleges and to review patient load factors to be in line with the modern practises and procedures of medical education and services, which include equipment-intensive patient care.

Recent Measures and their Impact on Services Sector

Among the numerous steps the government has taken to advance the services industry in India, some recent initiatives include: I increasing SEIS (Service Export from India Scheme) incentives for notified services in business, legal, accounting, architectural, engineering, educational, hospital, hotels, and restaurants; (ii) extending the validity period of "duty credit scrips" from 18 months to 24 months to improve their usefulness in the GST framework; and (iii) implementing reduplication for notified services in the hospitality sector. Other initiatives include the following: I the digital India programme in the IT sector; (ii) the "adopt a heritage scheme" to promote world heritage sites in India; (iii) the creation of the "national medical and wellness tourism board" (NMWTB) to promote medical tourism; (iv) easing procedural compliance for ship registration and measures to promote cruise shipping and coastal shipping; and (v) the introduction of the Pradhan Mantri Awash Yojana, the Smart Cities Mission,

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) According to Keynes, fiscal policy is a tool that the government can use to effectively intervene in order to achieve the desired growth (or control) in significant economic variables such as income, employment, price, etc. One of the two types of fiscal policy—i.e., expansionary fiscal policy or contractionary fiscal policy—is employed to accomplish this.

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. With the aid of the Keynesian National Income Identity, this can be better understood.

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. While the imposition of higher taxes reduces overall demand, they also have a negative impact on 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 traditional methods of cultivation, dependence on the monsoon, small land holdings, low productivity, reduction in subsidies during the post-reform years of the 1990s, low farmer skill levels, inadequate infrastructure investment, and price volatility are the main causes of the decline in the agricultural sector's share of the overall GDP. The growth rates of the GDP measured at constant prices can be another way to examine the relative performance of the three different 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. Approximately 2 billion eggs were produced in 1951, and 95 billion eggs were produced in 2018. Despite a significant increase in its population, India has changed from being a food importer to a food-self-sufficient country as a result of these developments (more than 3 times over the period 1951-2018). The various stages of India's Green revolution, which began in the middle of the 1960s, are to thank for the country's achievement of self-sufficiency in food production.

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. (Table 9.3). 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.

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

6) Differentiate between:

(a) Micro & Tiny Enterprises and Small Enterprises.

Ans) Starting with small neighbourhood shops or outlets and moving up to larger grocery store chains or franchise stores, there are various business enterprises and corporations. Depending on their need for labour, these companies employ a number of people. There is a minimum capital requirement to launch such business endeavours. Every day, a sizable number of micro and small businesses are visible to us, from the photocopy shop in the local market to the evening chaat stall to the little eatery in the town square and the store selling home goods. The government recently changed the definition of MSMEs by raising the investment cap, adding a new turnover criterion, and eliminating the distinctions between manufacturing and service 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.

(c) Fiscal Deficit and Revenue Deficit.

Ans) The term "revenue deficit" describes the difference between the government's total revenue expenditures and total revenue receipts. Total revenue spent minus total revenue received is the revenue deficit. OR Total Revenue Expenditure - (Tax Revenue + Non-Tax Revenue) is the revenue deficit.

A fiscal year's fiscal deficit is the difference between total expenditures and total receipts, excluding borrowings. Total budgetary outlays minus total budgetary receipts minus borrowings OR Revenue Expenditures minus Capital Expenditures equals the fiscal deficit. Capital Expenditures do not include borrowings. The fiscal deficit reveals the government's borrowing needs for the fiscal year. The amount of additional financial resources required to cover government expenses is known as the fiscal deficit.

7) Write short notes on the following.

(a) Intermediate Services Sector.

Ans) Engineering and research and development are two dynamic service industries that have recently experienced rapid productivity growth on a global scale. The majority of these services support the manufacturing industry and are therefore included in finished goods. Research and development (R&D) in particular contribute to the creation of new products as well as the improvement of already existing ones. R&D services are considered intermediate services in this sense and contribute to cross-border services. An example of a good that can be traded is a mobile phone. It is a material good that is used by end users. But the mobile phone industry would not exist without the support of the service sector. All of us have witnessed the frequent changes in mobile phone models and features. Many of the components used in their manufacturing are provided by small businesses in the informal sector that employ fewer than 10 people.

(b) Priority Lending Sector.

Ans) Thanks to its designation as a priority lending sector, the MSME sector now has easier access to credit. Banks are obligated to make sure that a predetermined percentage of their total lending—currently 40% of net bank credit for domestic commercial banks and 32% for foreign banks—goes to priority industries like agriculture, small businesses, retail trade, etc. It is recommended that public sector banks establish at least one specialised branch in each district for this reason. It is planned for a "cluster-based approach" to lending to offer comprehensive service and meet the variety of needs of the MSME sector.

(c) Small Holders Aggregation.

Ans) About 86 percent of all operational holdings in India are small and marginal. It is extremely difficult to make them economically viable. Putting these holdings together through a suitable institutional arrangement is one way to deal with the problem. Promotion of Farmer Producer Organizations (FPOs) is a key initiative in this situation. Smallholders can be combined and integrated into the agricultural value chain with the aid of FPOs, which also ensure that they have better access to capital, technology, inputs, and markets. Under the Indian Companies Act, agricultural producers can organise into groups and register as such. To encourage the formation of FPOs, Farmers Agribusiness Consortium serves as a nodal organisation.