A brief overview of the previous class (5:03 PM)
INDIA's GROWTH V/S CHINESE GROWTH (05:06 PM)
- After Independence, India was producing more consumer goods and India was importing capital goods.
- Today also, 71 unit is consumer goods, and 29 units of Capital goods (Out of 100).
- Whereas China is producing 55 units of consumer goods and 45 units of capital goods (Out of 100).
- China is focusing on capital formation i.e. accumulation of capital goods. In the future, this product will increase, and china will export this surplus production. Chinese growth was driven by export-led growth.
- China opened its economy earlier than India and it attracted foreign investors. Due to cheap labour, it produced more goods and exports.
- In India, domestic consumption was more so our model was Consumption-led growth.
- Make-in-India v/s Make-for-India- Make-for-India concept was given by Raghuram Rajan which means, making customized products for the masses for domestic consumption.
- Liquidity/ Liquid asset- This can be easily converted into cash.
- Liquid currency- which is excepted by everybody. Example- Dollar.
- Trade also happens in dollars or other liquid currencies such as Euros, Pounds, and Yen. Since India's currency is not a liquid currency we have to maintain a reserve. And this reserve is maintained by RBI/ central bank which is called FOREX Reserve.
- When exports are made then foreign countries will pay in Dollars, which means there is an inflow of Dollars.
- When we import, then there will be an outflow of Dollars.
- Trade deficit- When imports are more than Exports. Suppose 1000 $ is outflow and 500$ is inflow then it means there is a deficit of 500$. And this deficit is because of trade so it is called a Trade deficit.
- During, the 1960s, we were importing medicines and heavy machinery from the Soviet Union, etc.
- How to get Dollars?- From the FOREX market.
- Forex market- where buyers and sellers meet to buy or sell the Dollar or any other foreign currency.
- Case I- If the price of one dollar is 100 Ruppes- In this case, Dollar is STRONGER, COSTLIER. In comparison to Ruppee is WEAKER, or CHEAPER.
- Case II- If the price of one dollar is 50 Ruppes- In this case, Dollar is CHEAPER, WEAKER. In comparison Ruppee is STRONGER, or COSTLIER.
- This cheap, strong, weak, costly, etc are decided by the Demand and Supply of the currency.
- If we move from case 1 to case 2, the Dollar value has reduced/ decreased and the Ruppe value has increased. This is in the context of comparison with other currencies.
- The transfers from another country will be favourable to the person living in India in case 1.
- When going abroad, it is good in case 2.
- A fall in rupee value with respect to Dollar is called Depreciation of the Ruppe (Moving from case 2 to case 1).
KEYWORDS RELATED TO TRADE (05:39 PM)
- Liquid asset
- Something that can be easily converted into cash.
- Liquid currency
- Generally accepted by all. Example- Dollar, Euro, Pound, Japanese Yen.
- The Chinese growth model is export driven. China has a higher proportion of capital goods to the total output in comparison to India.
- India's growth model is consumption driven. India has a higher proportion of consumption goods to the total output in comparison to china.
- Capital Formation
- It is nothing but an accumulation of capital goods in a country.
- Trade Deficit
- Imports are greater than Exports.
- Depreciation of currency
- It is nothing but falls in the value of a currency with respect to a strong currency like the dollar.
- A currency depreciates due to forces of demand and supply (Market fundamentals). Depreciation of currency makes exports cheaper and imports costly.
- Regular law of demand
- Demand not only deals with our willingness to buy a product but also our ability to pay.
- Appreciation of currency
- Increase in value of the currency.
IMPACT OF DEPRECIATION ON IMPORT & EXPORT (05:48 PM)
- When the trade deficit increases i.e. from -500$ to -1000$, it means more dollar is moving out.
- The supply of dollars in India will decrease. In the forex market, the price of the dollar will increase and we have to pay more rupees to pay the dollar.
- For example- earlier 65 rs for purchasing 1 dollar now 75 rupees to buy one dollar. It means the rupee value is depreciating. Rupee is becoming cheaper.
- So, if the trade deficit is on the higher side, then Rupee will depreciate.
- When 1$= 100rs i.e. our currency is weak, then it will be more favourable to the foreign companies to establish the company in India.
- The aviation sector will benefit in the case when the Ruppe is strong, as the aviation sector imports 80% of the oil (Aviation turbine fuel).
- Ruppe value depreciates- Exports are cheaper, and imports become costly.
- Rupee value appreciates- Exports are costly, and Imports are cheaper.
- Impact of depreciation
- Case 1- 1 $= 100 rs and Indian pen costs 100rs so Foreign importer will pay 1$ to import this Indian pen. In this case, EXPORT is cheaper.
- Case 2- 1$= 50 rs and Indian pen costs 100rs so foreign importer will have to pay 2$ to import this Indian pen. In this case, they will not BUY from India.
- If there is too much appreciation of Ruppee then it is not good for the Indian currency as our exports will become costly.
- This excess/over-appreciation of currency which makes export non-competitive is called DUTCH DISEASE.
- Devaluation-
- Devaluation is a mechanism in the fixed exchange rate system. It is nothing but a fall in the value of a currency based on the decision of the government or central bank authority.
- Currency war-
- Competitive devaluation of the currency to make exports cheaper.
INDIA's ECONOMIC HISTORY- LAND REFORMS (06:21 PM)
- India adopted socialism to ensure the welfare and avoid the concentration of wealth
- British Rule implemented, the Zamindari system, Mahalwari system, and Ryotwari system. This led to the emergence of the Parasitic class of Moneylenders.
- Once in debt, always in debt- Farmers fell into a debt trap. In all the systems, exploitation was common.
- To ensure social justice, the distribution of land to the landless was the utmost requirement. This led to Land reforms.
- But this Land reform was not fully successful. It was a partial success in communist states such as Kerala, West Bengal, etc.
- Land reforms focused on the abolition of Zamindars, Regulation of rent, and Ownership rights to tenants.
- In the 1960s there was drought and starvation and FOOD SECURITY became another challenge. India came up with FCI in 1965 and Buffer stock was maintained.
- In 1962, and 1965 India faced two wars.
- To increase the buffer stock we need food and thus we need to implement FIRST GREEN REVOLUTION (Norman Borlaug and M S Swaminathan), as we wanted to increase yield and become self-sufficient.
- First green revolution- Agriculture Credit+ Fertiliser+ HYV seeds, Irrigation.
- For this, Farmers needed money. This money can be availed through Banks or Government should give a subsidy.
- At that time, Banks were privately run and used to work for a profit. So PM decided to Nationalize the Banks.
- Nationalisation means converting private ownership into government. In 1969, 14 banks were nationalized. In 1989 other 6 were also Nationalized.
- Nationalization will help in FINANCIAL INCLUSION.
- Financial inclusion means everybody should have a bank account, extending banking services to every nook and corner of India.
LAND REFORMS (06:39 PM)
- Mainly focused on the distribution of land to the landless.
- Land reforms focused on other aspects like Zamindari abolition, Regulation of rent for tenant farmers, Security of tenure, Ownership rights for tenants, consolidation of landholdings, and cooperative farming.
- Food security
- Food security focuses on Availability, Affordability, Stability, and also Nutrition.
- Setting up of FCI (Food corporation of India) in 1965 is one of the important reforms in ensuring food security.
- Financial Inclusion
- Spreading of financial services or banking services to every nook and corner of India. In simple words, everybody should have a bank account.
- Banks' nationalization in 1969, (14 banks) had to focus on Financial inclusion as one of its important objectives.
- First Green Revolution
- Norman Borlaug is the father of the 1st Green Revolution. It focuses on increasing agricultural yield by using High yield variety seeds, chemical fertilizers, and irrigation facilities. etc
- Punjab and Haryana have benefitted the maximum with respect to Green Revolution.
WAYS OF DOING BUSINESS (07:07 PM)
- DEBT
- One can arrange money either through DEBT or one can dilute the ownership i.e. selling EQUITY.
- Bonds can be issued by the government, Companies, or Municipality
- BOND- A Bond is used to raise debt. Thus it is called a Debt instrument. A bond is a piece of paper where the amount, maturity period, and rate of interest are mentioned, as who is issuing the paper, price, and interest is mentioned. The interest is called a coupon.
- After the maturity period, the principal amount will be given back.
- Before the maturity period also, the bond can be sold.
- Definition
- Bonds are debt instruments used for raising debt. Bondholders are creditors. Inflation goes against bondholder
- Bondholders are creditors or lenders.
- EQUITY
- Initial Public Offering- In equity, the company has never issued its share, and when the company is selling the shares for the first time then it is called an Initial public offering.
- If the company is diluting the shares again and selling its share again, then it is called a Follow-on Public offer.
- Primary market- Buying shares directly from the market. Example- IPO, FPO.
- Secondary market- Selling it to somebody or buying it from somebody from the stock market.
- Primary market
- In the primary market, you have to buy shares directly from the company. Example- IPO (Initial public offering).
- IPO (Initial public offering)
- If the company is diluting ownership and issuing shares for the first time. It is called an initial public offering.
- Venture capitalist
- Venture capitalist funds risky startups.
- Crony-capitalism
- It is used in a negative sense. It indicates a nexus between Government and Business houses.
- Crony capitalism reduces efficiency.
SITUATION OF INDIA POST 1970 (07:50 PM)
- By the time of 1970s Indian situation was bad-
- On one side, License raj was hurting industries, PSUs were in losses, Agriculture was not performing well, and Banks were nationalized.
- On the other side, the government was importing heavy machinery thus trade deficit was increasing. Our FOREX reserve was falling. India was in a difficult position.
- Fiscal policy was also not prudent, tax collection was less and the government was spending more. Thus deficit was more with respect to the Budget.
- Also, there was a challenge of inflation because of the high cost of raw materials and the taxation policy was not good (High tax rate), PSUs were less efficient with production thus the cost of production was more.
- Rural demand was less as agriculture was not doing well, and manufacturing is not doing well thus Urban demand was also less.
- By the 1980s, banks were not doing well and they were in losses.
- India was facing troubling waters and In this scenario, India decided to adopt certain reforms but it failed.
- By the time of 1990s, India started getting into ECONOMIC CRISIS.
- During the GULF WAR period, oil prices started rising.
- India went into crisis and it was mainly because India lacked FOREX reserves.
- The 1991 Year was a watershed moment in Indian economic history.
The Topic for the next class:- India's economic history post-1991.
Questions for practice
1)
Consider the following statements:
- Depreciation refers to the fall in the value of the rupee due to the withdrawal of foreign capital from the economy.
- Devaluation is a deliberate effort by the Central Bank to bring down the value of the rupee to boost earnings from exports.
Which of the above statements is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 and 2
2)
With reference to Financial Inclusion, consider the following statements:
- Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit.
- Financial Inclusion enables the reduction of the gap between the rich and poor population.
Which of the statements given above is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2
3)
Which among the following is/are tools for raising funds in Primary Market?
- Initial Public Offer
- Follow-on Public Offer
Select the correct answer from the codes given below:
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2
4)
Consider the following statement regarding "Capital formation":
- It is the process of an increase in the physical stock of capital
- Capital formation and Investment are the same things that are used interchangeably.
Which of the statements given above is/are correct?
(a)1 only
(b)2 only
(c)1 and 2 only
(d)None of the above
5)
Consider the following statements with respect to the Bond:
- It is a debt instrument that mentions the issuing authority who is the borrower
- A bond is proof of borrowing and not a commitment to payback
- It also mentions the face value which is the amount borrowed against the bond
Which of the statements given above is/are correct?
(a)1 and 3 Only
(b)2 and 3 Only
(c)1 and 2 Only
(d)All of the Above
6)
Which of the following statement best describe "Liquidity"?
(a)Any source which can be converted into cash without any time delay and at almost no cost of conversion.
(b)The Money with the Govenment.
(c)The money in the banks.
(d)None of the above.
7)
Trade deficit refers to
(a)More imports and lesser exports
(b)Lack of production capacity
(c)Low consumption but high production
(d)Excessive production of capital goods
8)
Consider these statements in the context of the Chinese and Indian economic model
- India"s economic model is driven by export-oriented whereas the Chinese growth model is driven by Domestic consumption.
- Out of the total goods produced, China has a higher proportion of capital goods in comparison to India.
Which of the above-mentioned Statement(s) is/are INCORRECT?
(a)1 only
(b)2 only
(c)Both 1& 2
(d)None of the above
9)
Write a note on financial inclusion and its importance. (10 Marks/150 Words)
10)
Compare the Indian growth model and the Chinese growth model by giving relevant examples. (10 marks/ 150 words)
11)
Discuss the ways in which a Business can be started with relevant examples. (10 marks/ 150 words)
Answers
1) c
2) c
3) c
4) c
5) a
6) a
7) a
8) a
Q1.
What do you understand by Appreciation and Depreciation of currency? Discuss its impact on the trade by giving examples. (10 marks/ 150 words)
(10 marks)
0 Comments