Dear Aspirants,

This Spotlight is a part of our Mission Nikaalo Prelims-2023.

You can check the broad timetable of Nikaalo Prelims here

Session Details

YouTube LIVE with Parth sir – 1 PM  – Prelims Spotlight Session

Evening 04 PM  – Daily Mini Tests

Telegram LIVE with Sukanya ma’am – 06 PM  – Current Affairs Session

Join our Official telegram channel for Study material and Daily Sessions Here

---

3rd May 2023

External Sectors of India 

All economic activities of an economy which take place in foreign currency fall in the external sector such as balanced of payment, export, import, foreign investment, external debt, current account, capital account, exchange rates etc.

FOREX RESERVES

Foreign exchange reserves are assets denominated in a foreign currency that are held on reserve by a central bank. These may include foreign currencies, bonds, treasury bills and other government securities.

Forex Reserves Consist of:	• Bank deposits • Gold • Special drawing rights (SDRS) • Reserve tranche position (RTP) • Foreign currency assets (FCA) • Government securities
SDR	• SDR is an international reserve asset, created by the IMF in 1969. • Value of the SDR is based on a basket of five currencies- Dollar, Euro, Renminbi, Yen, and Pound Sterling. • It is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.

EXCHANGE RATE

Exchange rate is Price at which one currency is converted into or exchanged for another currency.

Various Exchange rates mechanism:

FIXED EXCHANGE RATE	FLOATING EXCHANGE RATE	MANAGED FLOATING RATE
Complete intervention of Authority (government or central bank) in determination of the currency exchange rate.	Market forces(demand and supply) determine the value of currency No role of authority	Exchange rate is largely determined by market forces. In crisis, central banks may intervene to stabilize the exchange rate

NEER vs REER

Nominal Effective Exchange Rate (NEER)	Real Effective Exchange Rate (REER)
Weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies	Weighted average of nominal exchange rates, adjusted for inflation.
It is the exchange rate of one currency against a basket of currencies, weighted according to trade with each country (not adjusted for inflation).	Is calculated on the basis of NEER. Captures inflation differentials between country and its major trading partners and reflects the degree of external competitiveness

CURRENCY CONVERTIBILITY

Currency convertibility is the ease with which the currency of a country can be freely converted into any other foreign currency or gold at market determined exchange rate.

Partial Convertibility:	• Portion allowed by the government which can be converted into foreign currency with least restrictions. • Union Budget for 1992-93, introduced it on current account under Liberalized Exchange Rate Management System (LERMS) • Also known as Dual exchange system. • Presently partial convertibility still operational on capital account.
Full Convertibility:	• Freedom to convert domestic currency into any foreign currency and vice versa without any regulatory intervention. • Dual exchange rate system got automatically abolished and LERMS was now based upon the open market exchange. • In 1994, the Government of India declared full convertibility of Rupee on Current account.
Tarapore Committee I (1997) and II (2006):	• Constituted by the RBI for suggesting a roadmap on full convertibility of Rupee on Capital Account.

Advantages of capital account convertibility:

• Availability of large funds
• Reduction in cost of capital.
• Greater financial competitiveness.
• Increase in FII/FPI flow.

BALANCE OF PAYMENT

A systematic record of all economic transactions between the residents of one country with the residents of the other country in a financial year.

It consists of balance of trade, balance of current account and capital account.

Balance of trade: Difference between the monetary value of a nation’s exports and imports over a certain time period.

Balance of payments divides transactions in two accounts:

Current account

Capital account

Current Account Invisible Visible Goods(+) Services [+) Income 1. Dividend 2. Interest 3. Profit Transfer [+] 1. Gift 2. Donation 3. Remittance

Capital account [+] Investment [+] 1.Sovereign 2.Commercial NRI account [+] 1. Gift 2.Donation 3.Remittance Loan (+) 1 FDI 2. FII/FPI

	CURRENT ACCOUNT	CAPITAL ACCOUNT
Meaning	• Records imports and exports of visible and invisibles • Short term implication transactions • Covers only earnings and spending. • Excludes any borrowings and lending.	• Shows capital expenditure and income for country • Long term implication transactions • Only includes borrowings and lending by a country
Components	• Visible trade(Export and Import of goods-Merchandise transactions ) • Invisible trade(Export and Import of services) • Unilateral transactions	• Direct Investment (FDI) • Portfolio Investment (FPI) • Loans / External commercial borrowing (ECB) • Non-resident’s investment in Bank, Insurance, Pension schemes. • RBI’s foreign exchange reserve
Deficit (CAD)	• If the value of the goods and services imported exceeds the value of those exported. • Current Account deficit = Trade gap(export – import) + Net current transfers (foreign aid) + Net factor income (Interest, Dividend)	• When more money is flowing out of a country to acquire assets and rights abroad
Surplus	• If the value of the goods and services exported exceeds the value of those imported.	• Money is flowing into the country, but these inflows reflect changes in the ownership of national assets by way of sale or borrowing.
Convertibility	• Current account convertibility relates to the removal of restrictions on payments relating to the international exchange of goals, services and factor incomes.	• Capital account convertibility refers to a liberalization of a country’s capital transactions such as loans and investment.
Current status	• Allowed Full convertibility	• Only Partial convertibility

EXTERNAL DEBT

Part of a country s debt which has been borrowed from foreign creditors which includes private commercial banks, international financial institutions such as the World Bank, International Monetary Fund (IMF), and sovereign governments.

Types of external debts:

Short term debt: Maturity period 1 year or less

Long term debt: Maturity period more than 1 year

Sovereign debt : Bonds issued by the national government in any foreign currency to generate funds to meet its financial expenses.

Schemes- Socio economic Development, Poverty and Planning

Refer to the schemes compilation.

Dear Aspirants,

This Spotlight is a part of our Mission Nikaalo Prelims-2023.

You can check the broad timetable of Nikaalo Prelims here

Session Details

YouTube LIVE with Parth sir – 7 PM  – Prelims Spotlight Session

Evening 04 PM  – Daily Mini Tests

Join our Official telegram channel for Study material and Daily Sessions Here

---

1st May 2023

Inflation

Inflation is mainly caused either by demand Pull factors or Cost Push factors. Apart from demand and supply factors, Inflation sometimes is also caused by structural bottlenecks and policies of the government and the central banks. Therefore, the major causes of Inflation are:

• Demand Pull Factors (when Aggregate Demand exceeds Aggregate Supply at Full employment level).
• Cost Push Factors (when Aggregate supply increases due to increase in the cost of production while Aggregate demand remains the same).
• Structural Bottlenecks (Agriculture Prices fluctuations, Weak Infrastructure etc.)
• Monetary Policy Intervention by the Central Banks.
• Expansionary Fiscal Policy by the Government.

Demand and Supply factors can be further sub divided into the following:

Inflationary Gap: the Inflationary gap is a situation which arises when Aggregate demand in an economy exceeds the Aggregate supply at the full employment level.

Deflationary Gap: Deflationary Gap is a situation which arises when Aggregate demand in the economy falls short of Aggregate Supply at the full employment level.

Stagflation:  The falling growth along with rising prices makes cost push inflation more dangerous than the demand-pull inflation. The situation of rising prices along with falling growth and employment is called as stagflation.

Hyperinflation: Hyperinflation is a situation when inflation rises at an extremely faster rate. The rate of inflation can increase from 50 times to 300 times. The major causes of the hyperinflation are; government issuing too much currency to finance its deficits; wars and political instabilities and unexpected increase in people’s anticipation of future inflation.

Structural Inflation

• Structuralist Inflation is another form of Inflation mostly prevalent in the Developing and Low-Income Countries.
• The Structural school argues that inflation in the developing countries are mainly due to the weak structure of their economies.

Deflation: Deflation is when the overall price level in the economy falls for a period of time.Deflation is when, for instance, the price of a basket of goods has fallen from Rs 100 to Rs 80. It’s the reduction in overall prices of goods.

Disinflation: Disinflation is a situation in which the rate of inflation falls over a period of time. Remember the difference; disinflation is when the inflation rate is falling from say 5% to 3%.

Headline versus Core Inflation

The headline inflation measure demonstrates overall inflation in the economy. Conversely, the core inflation measures exclude the prices of highly volatile food and fuel components from the inflation index.

Core inflation excludes the highly volatile food and fuel components and therefore represents the underlying trend inflation. 

Banking and Monetary Policy

What is monetary policy?

Broadly speaking, there are two types of methods of controlling credit.

Measure of Money Supply in India

M1	M2	M3	M4
It is also known as Narrow Money.	It is a broader concept of the money supply.	It is also known as Broad Money.	M4 includes all items of M3 along with total deposits of post office saving accounts.
M1= C+DD+OD C= Currency with Public. DD= Demand Deposit with the public in the Banks. OD= Other Deposits held by the public with RBI.	M2= M1 + Saving deposits with the post office saving banks. M1 is distinguished from M2 because the post office saving deposits are not as liquid as Bank deposits.	M3 = M1+ Time Deposits with the Bank. Time deposits serve as a store of wealth and represent a saving of the people and are not as liquid as they cannot be withdrawn through cheques or ATMs as compared to money deposited in Demand deposits.	M4= M3+Total Deposits with Post Office Saving Organisations. M4 however, excludes National Saving Certificates of Post Offices.
It is the most liquid form of the money supply.		M3 is the most popular and essential measure of the money supply. The monetary committee headed by late Prof Sukhamoy Chakravarty recommended its use for monetary planning in the economy. M3 is also called Aggregate Monetary Resource

---

Dear Aspirants,

This Spotlight is a part of our Mission Nikaalo Prelims-2023.

You can check the broad timetable of Nikaalo Prelims here

Session Details

YouTube LIVE with Parth sir – 7 PM  – Prelims Spotlight Session

Evening 04 PM  – Daily Mini Tests

Join our Official telegram channel for Study material and Daily Sessions Here

---

1st May 2023

Patterns of Economic Indicators

An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles.

NATIONAL INCOME

• National Income is the total value of all final goods and services produced by the country in certain year. The growth of National Income helps to know the progress of the country.
• In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income.
• National Income includes payments made to all resources in the form of wages, interest, rent and profits.

NATIONAL INCOME ACCOUNTING (NIA)

• National Income Accounting is a method or technique used to measure the economic activity in the national economy as a whole.
• It is the bookkeeping system which measures the level of economic activity in a given time period
• NIA sets rules and definition to measure aggregate economic activity and tries to summarise the performance of the economy

Indicators: GDP

• Gross Domestic Product is the market value of all the goods and services produced within the domestic territory of a country during a specified time period, usually one year.
• Accounting Year = Fiscal Year; for India it is 1st of April to 31st of March (next year)
• Will include the income generated by MNCs in India

Domestic Territory = Political frontiers of the country including its territorial waters+ Embassies/Consulates + Military Establishments of the country abroad + Ships/Aircrafts/Fishing Vessels/Oil Rigs belonging to the residents of the country

GDP does not include :

• Capital goods (e.g. machinery) are included in GDP, but intermediate goods (e.g. raw materials) are not.
• Intermediate goods and services are not included to avoid double counting.
• Same good can be final (you consuming milk ) or intermediate (milk in the restaurant) depending on the usage.

GROWTH RATE &GDP DEFLATOR

• Growth Rate (%) = [GDP (Present year – Last Year) / Last Year] x 100
• But, quantitatively the production may not have improved (From 1 kg garlics to 2 kg garlics), and only because of inflation in the prices (₹ 10/kg garlic to ₹ 100/kg) the growth rate may be appear high.
• Therefore (to remove the inflation impact on growth rate), we must select a base year, and convert the current prices to constant prices.
• The ratio of these GDPs is called ‘GDP deflator’, it presents a picture of inflation like CPI and WPI but, unlike CPI & WPI it’s not based on a fixed basket of commodities.
• These figures are revised as the new data arrives / previous data is cross verified & corrected.

GDP AND NATIONAL INCOME

Gross National Income (GNI)

• According to OECDà GNI as GDP + NET receipts from abroad (wages, interest, profit, rent) plus net taxes & subsidies receivable from abroad. Here, ‘Wages and salaries’ from abroad = ‘Guest’ workers who reside abroad for less than 12 months and whose centre of economic interest remains in their home country

National Disposable Income

• National Disposable Income= NNP + Other Current Transfers from rest of the world (remittances, gift, donations etc.)National Disposable Income gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal.

Personal Disposable Income

• Personal Income – Personal Tax Payments (e.g. income tax) – Non-tax Payments (e.g. fines)

Fiscal Policy

What is Fiscal Policy? Fiscal Policy deals with the revenue and expenditure policy of the Govt. The word fiscal has been derived from the word ‘fisk’ which means public treasury or Govt funds.

Objectives of Fiscal Policy

The following are the objectives of the Fiscal Policy:

1. Higher Economic Growth
2. Price Stability
3. Reduction in Inequality

What are the components of Fiscal Policy?

There are three components of the Fiscal Policy of India:

1. Government Receipts
2. Government Expenditure
3. Public Debt

Government Receipts

The categorisation of the government receipts is given below:

1. Revenue Receipt
   • Tax Revenue
     • Direct Tax
     • Indirect Tax
   • Non-Tax Revenue
     • Fees
     • License and Permits
     • Fines and Penalties, etc
2. Capital Receipt
   • Loans Recovery
   • Disinvestments
   • Borrowing and other liabilities

Government Expenditure

There are two classifications of public expenditure:

1. Revenue Expenditure – It is a recurring expenditure:
   • Interest Payments
   • Defence Expenses
   • Salaries to Central Government employees, etc are examples of  revenue expenditure
2. Capital Expenditure – It is a non-recurring expenditure
   • Loans repayments
   • Loans to public enterprises, etc.

---