INDIAN ECONOMY ON THE EVE OF INDEPENDENCE (PART 1)

On the eve of independence on the 15 August, 1947, Indian economy exhibited low level of economic growth. The policies followed by the British in India during their rule after the victory at The Battle of Plassey,1757, was that of a feeder economy with the basic purpose of draining the wealth of India, by using its physical and human resources as raw materials for  industrial requirements back in England. The British rule in India followed the policy of protection and promotion for the interest of Britain, and in the process led to the underdevelopment of India.

India was a prosperous country with renowned handicraft products demanded all over the world. These handicrafts were mainly that of silk and cotton, metal-works and precious stone works. The Daccai Muslin or most famously known as the Malmal Shahi was the finest cotton fabric which gained worldwide fame.      

According to the British economist Angus Maddison, before the advent of the British in 1700, the share of India in world economy was 24.4% which was reduced to just 4.2% in 1950. The systematic exploitation of resources of India for its own interest by Britain led to the decay of traditional handicrafts and domestic industries of India which led to poverty and underdevelopment of India.

The British were not interested in estimating the national as well as per capita incomes of India. They did not take any significant step towards initiation of estimating it. But few individual works of Dadabhai Naoroji, William Digby, Findlay Shirras, Dr. V.K.R.V. Rao and R.C. Desai are worth mentioning. But their works were conflicting with each other and thus no clear figure could be derived at.

It was Professor V.K.R.V. Rao whose estimation of national and per capita incomes of India was most significant. The first scientific estimation of national and per capita incomes was given by him.

QUIZ

Please give answers of the following questions in the comment section below 

1. Who was the Nawab of Bengal defeated by the English East India Company in the Battle of Plassey in 1757?

2. Who estimated the national income of India for the first time? Name the work (book) where this estimation appeared.

3. According to Prof. V.K.R.V. Rao what was the percentage growth of national income and per capita  income of India in the first half of the twentieth century?

 

CONTROL OF MONEY SUPPLY BY RBI (PART 3) : MARGIN REQUIREMENT, RATIONING OF CREDIT & MORAL SUASION

There are certain sectors in an economy which act as principal source of instability in the economy.

QUALITATIVE INSTRUMENTS OF CREDIT CONTROL are used by RBI to solve the problems of these select sectors by increasing or decreasing the supply of money.

MARGIN REQUIREMENT

It refers to the difference between the current value of collaterals offered for loans and the actual values of loan granted.

- Rise in Margin Requirement controls the problem of inflation

- Fall in Margin Requirement controls the problem of deflation

RATIONING OF CREDIT

It refers to fixation of credit quota (limit) for different business activities.

The commercial banks cannot exceed the quota limits (fixed by RBI for different business activities ) while granting loans

- Introduction of Credit Rationing controls inflation

- Withdrawal of Credit Rationing controls deflation

MORAL SUASION

It is like advice given to commercial banks by the RBI by combining measures of both PERSUASION and PRESSURE.

- The banks are advised to restrict loans during inflation

- The banks are advised to be liberal in lending loans during deflalton

CONTROL OF MONEY SUPPLY BY RBI (PART 2) : REVERSE REPO RATE, CRR AND SLR

REVERSE REPO RATE

- It is the rate at which the RBI accepts deposits from the commercial banks through government securities

- RBI raises the Reverse Repo Rate to control INFLATION

- RBI reduces the Reverse Repo Rate to control DEFLATION

CASH RESERVE RATIO

- CRR refers to the minimum percentage of Net Demand and Time Liabilities (NDTL), to be kept by commercial banks with the RBI

- RBI fixes the CRR

- In times of Inflation RBI raises the CRR to control it

- In times of Deflation RBI reduces the CRR as a measure of control

STATUTORY LIQUIDITY RATIO

- A fixed percentage of LIQUID ASSETS which every commercial bank is required to maintain with itself is known as the SLR

- These liquid assets are in the form of : CASH, GOLD and UNENCUMBERED APPROVED SECURITIES

- SLR is also fixed by the RBI

- RBI raises SLR to control Inflation

- RBI reduces SLR to control Deflation

CONTROL OF MONEY SUPPLY BY RBI (PART 1) : BANK RATE , OPEN MARKET OPERATIONS AND REPO

The Central Bank (RBI) controls the supply of money in the economy by adopting various measures relating to credit supply by the commercial banks.

These measures are both

(i) Quantitative - Bank Rate, Open Market Operations, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio and Statutory Liquidity Ratio

(Ii) Qualitative - Margin Requirement, Rationing of Credit and Moral Suasion

We shall discuss Bank Rate, OMO and Repo Rate in this video

- Bank Rate refers to the rate of interest at which the RBI lends money to the commercial banks fulfilling the instant loan requirement of the commercial banks

- Open Market Operations refer to the sale and purchase of securities in the open market by the RBI on behalf of the government

- Repo Rate is the rate at which the RBI offers short term loans to the commercial banks by buying the government securities in the open market

(**Open Market refers to interbank trade in securities)

Difference between Bank Rate and Repo Rate

• Bank Rate refers to the rate of interest on loans offered by the RBI to the commercial banks without any collateral whereas Repo Rate refers to the rate of interest on loans offered by the RBI to the commercial banks with collateral.
• Bank Rate does not allow any facility of repurchase of securities. It is simply the rate of discount. Whereas, Repo Rate allows the repurchase of securities.
• Bank Rate relates to borrowings by the commercial banks to cope with their immediate cash requirement, whereas, Repo Rate relates to short term borrowings by the commercial banks. 

BANKING (PART 2) : CENTRAL BANK AND ITS FUNCTIONS

CENTRAL BANK is an APEX body that controls, regulates and directs the entire banking and monetary structure of the country.

FUNCTIONS OF CENTRAL BANK

- Bank of Issuing Notes

- Banker to the Government

- Bankers’ Bank and Supervisor

- Lender of the Last Resort

- Custodian of Foreign Exchange

- Clearing House

-  Control of Credit

CREATION OF CREDIT BY COMMERCIAL BANKS (PART 2)

-  Creation of credit by Commercial Banks by way of deposits

- Historical experience of Commercial Banks lead them to lend out loans to productive sectors by keeping with themselves certain RESERVES

- Money Multiplier is inversely related to Legal Reserve Ratio

- Money Multiplier = 1/LRR 

Which means that if LRR is raised, less money will be created by Commercial Banks and vice versa.

CREATION OF CREDIT BY COMMERCIAL BANKS (PART 1)

• Unlike the Central Bank, Commercial Banks do not have the authority of issuing notes and coins. But Commercial Banks have the ability to create money through credit
• Commercial Banks are able to create credit far exceeding the Primary Deposit
  
  
  Two assumptions, in order to understand credit creation by commercial banks:

  (i) The entire banking system is taken as a single unit i.e., BANKS

  (ii) All receipts and payments in the economy are done through BANKS
  
  
  - The depositors hold their primary deposits with the BANKS which are then given out as loans to the productive sectors - However, the BANKS cannot use the whole of deposit for lending - A certain minimum fraction of the deposits are kept by the BANKS as RESERVES, known as LEGAL RESERVE RATIO (LRR)
  LEGAL RESERVE RATIO (LRR) has two components. They are:
• Cash Reserve Ratio (CRR): Cash Reserve Ratio (CRR) is the share of a bank's total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.
• Statutory Liquidity Ratio (SLR): Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers.

BANKING (PART 1): COMMERCIAL BANK AND ITS FUNCTIONS

COMMERCIAL BANKS

Commercial bank is an institution which performs the functions of accepting deposits, granting loans and making investments, with the aim of earning profits.

Functions of a Commercial Bank

# Primary Functions include (1) Accepting Deposits (2) Advancing Loans

# Secondary Functions include (1) Overdraft Facility (2) Discounting Bills of Exchange (3) Agency Functions (4) General Utility Functions

- Unlike the Central Bank (RBI), commercial banks do not have the authority of issuing currency, but they create money by way of demand deposits

- Primary Deposits are cash deposits with the commercial banks by the people

- Secondary Deposits are those deposits which arise on account of loans by the banks to the people (these are also called Derivative Deposits)

- Total Demand Deposits of the Commercial Banks = (Primary Deposits + Secondary Deposits) of the Commercial Banks

MONEY (Part 3) : Supply of Money

MONEY SUPPLY

- Money Supply refers to stock or volume of money held by public at a particular point of time in an economy (and is therefore a stock concept)

- Money Supply will include only those money held by public i.e., individuals and business firms

- Stocks of money held by the government and the banking system of a country will never be treated as a part of the supply of money in the country (as they are the suppliers of money)

- Measures of Money Supply : M1, M2, M3 and M4 (and M3 is widely used as the Aggregate Monetary Resources of the country)

- Bank Money refers to demand deposits of the people with the commercial banks

- High powered money refers to monetary base or base money in the country ( includes currency and coins held by public, vault cash of commercial banks and cash reserves of commercial banks with the RBI)

Money (Part 2) Functions of Money

These short videos are prepared by me for easy recall of the day’s lesson taught to my students.

FUNCTIONS OF MONEY

PRIMARY

- Medium of Exchange

- Measure of Value

SECONDARY

- Standard of Deferred Payments

- Store of Value

Behavioral modifications through reading

 https://www.instagram.com/p/CQ417H7hWXv/?utm_medium=copy_link

Reading is the best way to calm our stressed minds during this pandemic. It also changes our behaviour and outlook. 

Money ( Part-1)

These short videos are prepared by me for easy recall of day's lesson taught to my students.

CONCEPTS

-    Money is a medium of exchange, which is used to measure value of goods as a standard of deferred payments and also to store a value

-    Barter system means exchange of one commodity for another. It is also called C-C economy.

-    Double coincidence of wants is necessary for barter system to work

-    Lack of double coincidence of wants made barter economy fail