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Indian Financial System

By vinodyadav Sep 14, 2010 958 Words





• The financial system of India refers to the system of borrowing and lending of funds or the demand for and the supply of funds of all individuals, business houses and the Government.

Commonly the FS is classified into

• Industrial finance: funds required for the conduct of industry and trade

• Agricultural finance: Funds needed and supplied for the conduct of agriculture and allied activities

• Development finance: Funds needed for development which includes both of the above

• Government finance: relates to demand for and supply of funds to meet Govt expenditure


• Non market transactions not taken into account

• Explain-

• open source software like linux

• Similar commercial product = 1 billion

• If people switch from commercial to non commercial we see a decline in GDP

Non monetary economy ignored

Underground economy

• "The underground economy refers to both legal activities, such as often found in construction and services industries where taxes are not withheld and paid, and illegal activities, such as drug dealing and prostitution.

• Black money, Black market, Black economy refers to the same

Ignores subsistence production

• Subsistence economy: Economy where production is carried on only to the extent of sufficiency for self consumption – marketable surplus is not at all considered

Ignores new products

• In case of National income at constant prices the base year not having a product like cell phone leads to rejection of product in calculations.

Ignores quality of goods

• Quality of goods have to considered because they have cause and effect relationship with quantity

• Cheaper less quality goods do not last long; thus people are forced to make frequent repeat purchases; whereas quality goods last long thus minimizing the repeat purchase quantity

Ignores quality improvements

• Earlier computers were energy hungry, costly and slow. Here the higher cost show higher national income.

• Comparatively higher computing power is available at low cost today which shows a relative decrease in national income

National income is not a reliable indicator of welfare

• The National Income aggregate of an economy doesn't help us in any way because, if the distribution of wealth is unequal then we have the extremes of lot of rich and lot of poor people.

It only takes how much not what is produced

• More medicines consumed reflects more national income but it is not a sign of welfare

Consistency or sustainability in growth of national income ignored

• No weightage is given for the above

Doesn't tell us whether it is capital consumption or real wealth expansion

• Government spending on building pyramids


• Determinants,

• Major issues of developments,

• India as a developing economy,

• Price stability – inflation,

• Price indices,

• Business cycle – features,

• Phases,

• Indicators – lead, lag, coincidental.


Determinants- Major issues- India as a developing economy- Contribution of different sectors- price stability-Business cycle

Economic Growth

• Increase in the amount of the goods and services produced by a country over time

• Various indicators can be used: real per capita GDP, real per capita GNP, …

• Economic growth notes

• In an economy there must be balanced economic growth of all sectors – agriculture, manufacturing industry and the service sector. Only then, economic growth will benefit all sectors of the population. Not only that, economic welfare depends not only on the growth of output but on the way it is distributed among different factors of production in the form of rent, wages, interest and profits.

Economic Development

• Progressive changes in the socio-economic structure of a country

• when we say there is development, there must be improvement in the quality of life

• Michael P. Todaro and Stephen C. Smith, “development must be conceived of as a multidimensional process involving major changes in social structures, popular attitudes and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty”.

Factors - Economic Development

• The factors that influence economic development can be divided into two broad categories

1. Economic factors

2. Non Economic factors

Economic factors

1. Capital stock and rate of capital accumulation

2. Marketable surplus of agriculture

3. Conditions in foreign trade

4. Economic system

Non – Economic factors

1. Human resources

2. Technical know-how and general education

3. Political freedom

4. Social organization

5. Corruption

6. Will to develop


• India – Developing economy?

• Low per capita income

• Inequitable distribution of income and poverty

• Predominance of agriculture

• Rapid population growth

• Unemployment

• Scarcity of Capital

• India – Developing Economy

• Economic development in India has two facets

1. Quantitative (National income trend)

2. Structural ( sluggish sectoral changes, growth of basic capital goods industry, development of infrastructure, progress on banking and financial sector)

Business Cycle

• Business cycles are a type of fluctuations found in the aggregate economic activity of nations that organize their work mainly in business enterprise. A cycle consists of expansions occurring at about the same time in many economic activities followed by similarly general recessions, contractions and revivals which merge with the expansion phase of the next cycle. This sequence of change is recurrent but not periodic - W.C.Mitchell


1. Recurring fluctuations (in the economy as a whole with free rhythm)

2. Period of business cycle is longer than a year

3. Presence of the alternating forces of expansion and contraction

4. Phenomenon of crisis (sharp and wide curves)

Phases :: Burns and mitchell (crest and trough)

1. Revival

2. Expansion

3. Recession

4. Contraction

• Joseph Schumpter( neibourhoods of equilibrium)

1. Prosperity

2. Recession

3. Depression

4. Recovery


1. LEAD 2.LAG 3.Coincidental

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