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.

Year	Gross NPA %
2021-2022	12%
2022-2023	15%