1 Summary Economics Class 41 ## BANKING IN INDIA (5:03 PM): - **Bank of Hindustan** was set up in **1770.** - Three Presidency Banks were set up Bank of Calcutta (1806), Bank of Bombay (1840), and Bank of Madras (1843). - The Reserve Bank of India was set up on the basis of the recommendations of the **Royal Commission on Indian Currency & Finance** under **Hilton Young.** - As per the **State Bank of India Act of 1955**, RBI acquired a controlling interest in the Imperial Bank of India. - On 1 July 1955, the Imperial Bank of India became the State Bank of India. - As of now, the Central Government has acquired all the SBI's hares with the RBI. - As per the **State Bank of India (Subsidiary Banks) Act 1959,** eight banks that belonged to earlier Princely states were made subsidiaries of SBI. - In 1969, 14 banks were nationalized and 6 more banks were nationalized in 1980. ## Functions of RBI: - It functions as a banker of the banks, a regulator of banks, a lender of the last resort, etc. - RBI also controls the overall banking activity in India as per the **Banking Regulation Act 1949.** - RBi has limited disciplinary controls( revoking licenses, mergers, etc.) over public sector banks as compared to private sector banks. - RBI also acts as a banker to the government - RBI is also the custodian of foreign reserves of India. - RBI also maintains the stability of the rupee with respect to foreign currency. - RBI does not decide the exchange rate but can intervene in foreign exchange markets to reduce the volatility of the rupee. ## Priority Sector Lending(PSL): - Banks are required to lend a certain portion of their total lending to sectors designated as **priority sectors.** - The total lending is called Aggregate Net Bank Credit(ANBC). - The requirement is that 40% of the total ANBC must be given to priority sectors. ## NPA: - Non-Performing Assets (NPA) simply refer to the loan amounts which were extended by the banks but which were never repaid ( both principal and interest). - A loan is declared as NPA when the principal and interest are not paid for a continuous period of 90 days. - **Net NPA=** Actual amount of loans classified as NPA. - **Gross NPA=** Net NPA + provisioning against NPA. - **Provisioning** here refers to the funds set aside by the banks to cover a part of their losses due to some of their loans turning NPA. ## Non-banking Financial Companies (NBFCs): - They refer to those financial institutions which are registered as companies and are in financial business. - Although they are not banks but do banking functions, hence also called **Shadow banks**. - They can both take deposits- NBFC(D) and not take deposits- NBFC(ND). ## SLIPPAGE RATIO (5:30 PM): - It is the rate at which good loans are turning bad. - The credit cost is the amount a bank expects to lose due to credit risk. - | | | | --- | --- | | **Year** | **Gross NPA %** | | 2021-2022 | 12% | | 2022-2023 | 15% | - The slippage ratio for the above case will be 3%. - The ratio is equal to the newly accrued (NPA)/(Total Standard Assets of the bank at the beginning of the year) \* 100. ## AGRICULTURE (6:00 PM): - **Labor Dualism in Agriculture:** - Much of the Indian labor force is still stuck in agriculture when it must ideally have shifted to sectors that offer higher wages. ## Trends in Agriculture: - The sector which is the largest employer of the workforce accounted for 18.8 % contribution (2021-2022) to GDP. - Agriculture registered a growth rate of 3.6%  in 2020-2021 (At a time when secondary and tertiary sectors were shut under the pandemic lockdown). - Growth in allied sectors including livestock, dairy, and fisheries have been the major drivers of overall growth in the sector. - The livestock sector has grown at a cumulative average growth rate of 8.15% over the last five years ending in 2020. - Improvement in the contribution of the allied sectors is in line with the recommendation of the committee made on double farmers' income under **Ashok Dalwai.** - The government has increased its focus on the food processing sector. - The sector is not only a major market for agri-product but also a significant employer of surplus workforce engaged in agriculture. - **The growth in agriculture and allied sectors focuses  on 4 major sectors-** - **I.**Crops - **II.**Livestock - **III.** Fishing - **IV.**Aquaculture. ## Problems with Indian Agriculture: - I. Labor Dualism - II. Outdated Technologies. - III. Fragmented landholdings - IV. Less Agricultural productivity. - V. Much of Agriculture is rain-fed. - VI. Policy follows a "One-Size-Fits-All " approach. - VII. Issues with both direct and indirect subsidies. - MSP is given on A2 + FL while farmers demand MSP to be based on C2. - VIII. Lack of Irrigation facilities. - IX. Less Research & development in the sector. - X. Increased costs of inputs. - XI. Less institutional credit. - Banks mostly lend only as per their Priority Sector Lending Targets. - Also, banks are reeling under the NPA burden. - XII. Issues with agricultural marketing- mainly APMC, Contract Farming laws. - XIII. High pressure on land- disguised employment, underdevelopment. - XIV Soil Testing. - XV. failure of Cooperative farming in India. - XVI. Cereal-centric production- farmers were more focused on selling to FCI and not on exporting. ## Importance of Agriculture in India: - Indian agriculture has reached the stage of development and maturity much before the now advanced countries of the world. - There was a proper balance between agriculture and industry and both flourished hand-in-hand till the mid-18th century. - The interference of the British and its deliberate policy which devastated cottage industries has disturbed the balance affecting the Indian economy. - Britisjers focussed on intermediaries like zamindars who directly exploited the poor farmers. - A substantial part of the produce was taken away by this parasitic class and the actual cultivator was left with near subsistence. - Therefore, Indian agriculture in the pre-independence period can be described as a subsistence occupation. - It was only after the advent of planning and more precisely, after the first Green Revolution that some farmers started adopting agriculture on a commercial basis. ## SHARE OF AGRICULTURE(6:30 PM): - At the time of World War I, agriculture contributed to around 2/3rd of the national income. - This was on account of the practical non-existence of industrial development and infrastructure. - However, after the initiation of planning, the share of agriculture has persistently declined, along with the development of industry and the tertiary sector. - From around 54% in 1951, it has almost reduced to 15.4% in 2015-2016. - The share of agriculture and national income is often considered an indicator of economic development. - Normally, developed economies are less dependent on agriculture compared to under-developed economies. - That means, as a country progresses, dependence on agriculture reduces. - Around 60% of the population was engaged in agriculture in the 1990s. - It has subsequently reduced to 48.9 % in 2011-2012. - With a rapid increase in population,  the absolute number of people engaged in agriculture has become exceedingly large. - The development of other sectors of the economy has not been sufficient to provide employment. - This has further increased the pressure on land. - This increased the problem of **disguised employment** and **under-employment.** - The scenario is the same for most underdeveloped economies. ## Agriculture's Role in poverty reduction: - According to **World Development Report,** over the last 25 years in developing countries,  one percent growth in agriculture is at least 2-3 times more effective in reducing poverty than the same growth coming from non-agricultural sectors. ## Provision of food surplus to exploding population: - The existing consumption levels in these countries are low. - With a little increase in per capita income, the demand for food increases exponentially. - Unless agriculture increases its marketed surplus of food grains, a crisis is likely to emerge. ## IMPORTANCE OF AGRICULTURE IN INTERNATIONAL TRADE (7:00 PM): - For several years, agro-based exports like cotton, silk, tea, etc accounted for more than 50% of our export earnings. - The development of agriculture in India is a pre-condition for sectoral diversification and economic development. - A growing surplus of agricultural is needed to meet the supply of food and agricultural raw materials at non-inflationary prices. - Agriculture plays an important role in widening the domestic market for industrial goods. - This is done by increasing the purchasing power of the rural sector and facilitating inter-sectoral transfers of capital needed for infrastructure development. - Therefore, agriculture has to be kept at the center of any reform agenda and reform process to progress with respect to poverty & malnutrition. ## E-Technology for farmers: ## Electronic National Agricultural Market(E-NAM): - The e-NAM was launched in 2016 as a pan-India electronic trading portal for agricultural commodities. - It seeks to create a unified agricultural market by fostering synergy among the existing APMC mandis. - It provides services such as contactless remote bidding and e-payments which are both transparent and efficient. - It seeks to leverage the physical infrastructure of the mandis through an online trading portal. - This will enable buyers situated even outside the Mandi/ State to participate in trading at the local level. ## Agricultural Produce Market Committees (APMCs): - To provide a support system to the farmers, APMCs were introduced in 1963. - It was made mandatory to sell agricultural products in the APMCs only. - APMCs operate with high mandi fees and other commissions, due to which the agricultural products get costlier without farmers getting the benefits. - APMC registration is not valid in another state, or even another Mandi of the same state. ## Benefits of E-NAM: - E-NAM basically increases the choice of the farmer when he brings his produce to the mandi for sale. - Local traders can bid for the produce, as also traders on the electronic platform sitting in other States/ Mandi. - The farmer may choose to accept either the local offer or the online offer. - In either case, the transaction will be on the books of the local mandi and they will continue to earn the market fee. - In fact, the volume of business will significantly increase as there will be greater competition for specific produce, resulting in higher market fees for the mandi. - The government also facilitates the transport of sold goods. ## DIRECT FARM SUBSIDIES (7:30 PM): - They are paid in the form of a direct cash subsidy and are given to farmers directly. - The beneficiary can also be made to pay the same price for the product, but he will receive a separate payment(like cashback) for the purchase. - **For example-**PM KISAN, etc. ## Indirect Subsidies: - They are extended in the form of lower prices, affordable credit, insurance options, waivers of agricultural loans, etc. - **For example-**MSP, fertilizer subsidy, etc. ## Animal Husbandry: - It deals with the breeding of livestock- buffaloes, cows, pigs, etc. that are useful to humans. - It includes poultry farming, dairy, fisheries, beekeeping, etc. too. ## Benefits: - **I. Contribution to GVA:** - It has an important place in the Indian economy. - Livestock contributes to around 5.2% of the total agricultural GVA. - **II. Additional Income:** - Additional income from animal husbandry can help augment rural income. - It also provides employment to about 8.8% of the population of India. - **III. Employment to millions:** - For many, it is the only source of livelihood. - About 20 million depend upon livestock for their livelihood. - **IV. Ensuring food security:** - The livestock provides meat, milk, eggs, etc. for human consumption. - **V. Transport:** - Pack animals (living in packs) like camels, donkeys, etc. are extensively used to transport goods, especially in hilly areas. - **VI. Nutrition:** - They serve a vital portion of protein by improving human health and welfare. - **VII. Cultural benefits & Social Security:** ## Benefits of allied activities: - Creation of multiple revenue sources for the farmer. - Helping the farmer during crop failure. - Special focus on dryland areas. - Small farmers with fragmented land can benefit from poultry and other allied activities. - Promote downstream industries and employment related to food production. ## Revision: - **Tier I capital** is needed to protect the bank without shutting down operations of the bank. - **Liquidity Coverage Ratio**- prevent bank term and short-term resilience of the bank. - Asset Reconstruction Company is to buy bad loans from other banks. - **Pent Up Demand** is the rise in demand after a fall in consumption. - Foreign tourist spending in India will be counted as exports. - **Mixed Recall Period** - spending on 5 non-food items is calculated for 365 days period and the rest items are calculated for 30 days. - **Dutch Disease** is the phenomenon of over-appreciation of currency would make the exports non-competitive in the market. - Higher inflation will see an increase in bond yields. - **Operation Twist** has been more successful than Repo rate operations. - Operation Twist will reduce long-term bond yields. - Operation Twist will also cause FD rates to decrease. - Operation Twist will drive consumption. - **Foreign Currency Convertible Bonds (FCCBs)** are issued by private entities to raise money from international markets. - FCCBs that can be converted to equity are considered under FDI. - FCCBs that can be converted to equity are considered under-External Commercial Borrowings. - **Tax elasticity** is the correlation between tax rate & tax revenue, while **tax buoyancy** is the percentage increase in tax revenue with respect to the percentage increase in GDP. - The **Laffer Curve** shows the relationship between tax revenue collected by the government and tax rates paid by citizens. - **Marginal Standing Facility (MSF)** operations can pledge those GSECs which are not part of SLR. - The major purpose of the **surcharge** is to reduce the disparity between the rich and the poor. - The surcharge is levied upon tax paid and not on annual income. - The **composition scheme** under GST is for small businesses. - The scheme is for tax compliance- only a certain portion of annual turnover is to be paid as GST. - **The Minimum Alternate Tax(MAT)** is a direct tax. - This tax is levied on corporate book profits that are levied on companies that do not pay corporate tax. ## The topic for the next class is Agricultural Marketing.