Macro Economics

Introduction

• Macroeconomics is a broader concept; it talks about the whole economics of the country. For example −
  • Growth of GDP
  • Total production of cereals in India
  • Total export in 2014
  • Unemployment
  • Inflation etc

• In the economy of a country, the output level of all the goods and services in the company have a tendency to move together. For example, if output of food grain is experiencing a growth, it is generally accompanied by a rise in the output level of industrial goods.
• The prices of different goods and services generally have a tendency to rise or fall simultaneously. We can also observe that the employment level in different production units also goes up or down together.
• Macroeconomics simplifies the analysis of how the country’s total production and level of employment are related to attributes (called ‘variables’) such as prices, rate of interest, wage rates, profits and so on.
• When these attributes start changing fast, like when prices are going up (in what is called an inflation), or employment and production levels are going down (heading for a depression), the general directions of the movements of these variables for all the individual commodities are usually of the same kind as are seen for the aggregates for the economy as a whole.

Types of Commodities

• All kinds of the commodities in an economy are divided into three major parts −
  • Agricultural goods
  • Industrial goods
  • Services
• Further, Macroeconomics tries to analyse how the individual output levels, prices, and employment levels of these different goods get determined.

Economic Agents

• Economic agents are those individuals or institutions who have an effect on the economy of a country. For example −
  • Consumers who decide how much to consume.
  • Producers who decide the production level.
  • Other agents like government, bank etc. who decide the different policies.
• Adam Smith, the father of modern economics, had suggested that if the buyers and the sellers in each market take their decisions following only their own self-interest, economists will not need to think of the wealth and welfare of the country as a whole separately.
• Macroeconomic policies are generally controlled and operated by the State itself or statutory bodies like the RBI, Securities Exchange Board of India (SEBI), etc.
• According to John Maynard Keynes (the writer of ‘The General Theory of Employment Interest and Money’), all the labours who are ready to work will be finding the employment and all the factories will be working at their full capacity.
• The classical and traditional thinking (of Keynes) changed after the Great Depression of 1929.
• The expenditure, which raises the production capacity of a firm or an enterprise is called investment expenditure.

Capitalist Economy

• The characteristics of a Capitalist Economy are −
  • It is based on wage-labour and private ownership of the means of production.
  • Here, most of the inputs and outputs of production are supplied through the market (i.e. they are commodities) and essentially all production is in this mode.
  • The sale and purchase of labour service takes place at wage rate.

• The capitalist country is that country in which production activities are mainly carried out by capitalist enterprises or several entrepreneurs.
• Land, Labour, and Capital are the key factors of production in a capitalist economy.
• Profit is the part of revenue, which is left with the entrepreneur after the payment of rent for land and building and wages to the labourers or workers.

Micro Economics

Introduction

• Needs are the basic items required for human survival. And, goods and services are produced to satisfy those basic needs. Every individual in one or the other way is engaged in the production of goods and services.
• As resources are limited; therefore, allocation of the resources and the distribution of the final mix of goods and services are the basic economic problems of our society.
• The basic economic activities of our society are production, exchange, and consumptions of goods and services.
• If production does not meet the demand, it leads to scarcity.

• These problems can be solved either by a personal discussion with the individual (whose demands need to be fulfilled) as done in the market or by a planned approach initiated by the central authority, i.e., the government at the center.

Types of Economy

• Based on the characteristics, an economy is divided into two types. They are −
  • Centrally planned economy
  • Market economy
• In a centrally planned economy, the government or the central authority plans and makes decisions regarding all the important activities in the economy.
• On the other hand, in the market economy, all the economic activities are planned and organized by the market.
• Market in economics is an institution that facilitates people free interaction and ensures the economic activities run smoothly. So, market is basically a center where people can exchange their products with each other.
• In economics, market is a place that regulates and manages the demand and prices of goods. For example, as the demand for product rises, prices of that product also rises.
• In the present world, most of the countries have mixed economies; it is an economic system with a mixture of economic planning with government intervention and market. Here, the government intervenes and makes important decisions. Markets are given partial liberty to make decisions, which would benefit the market and the economy.

• India accepted the policy of mixed economy after independence. In 1948, India declared itself a mixed economy for the very first time.
• Positive economic analysis describes how the different mechanisms of an economy work.
• Normative economic analysis is the study of what economic mechanism should be adopted in order to achieve a particular goal.
• Economics is broadly categorized into two groups. They are −
  • Microeconomics
  • Macroeconomics
• Microeconomics largely describes the behavior of individual economic agents in the markets for different goods and services and tries to figure out how prices and quantities of goods and services are determined through the interaction of different individuals in the markets.

• Major questions answered in Microeconomics are −
  • What is the level of total output in the economy?
  • How is the total output determined?
  • How does the total output grow over time?
  • Are the resources of the economy (e.g. labor) fully employed?
  • What are the reasons behind the unemployment of resources?
  • Why do prices rise?
• On the other hand, Macroeconomics describes the economy as a whole by focusing on aggregate measures, such as total output, employment, and aggregate price level.

Indian Economy - Open

Introduction

• In the modern world, most of the economies are ‘Open Economy’ because of the three following reasons −
  • Market Linkage − It means consumers and firms both have the opportunity to choose between domestic and foreign goods.
  • Financial Market Linkage − It means investors have the opportunity to choose between domestic and foreign assets.
  • Factor Market Linkage − It means firms can choose where to locate production and workers can choose where to work.

• Total foreign trade (i.e., exports + imports) as a proportion of GDP is a common measure of the degree of openness of an economy.

Features of Open Economy

• Every country has its own currency and in the international market, there are hundreds of currencies with different values; hence, the International Monetary System has been set up to handle these issues and ensure stability in international transactions.
• The Balance of Payments (BoP) keep a record of the transactions in goods, services, and assets between residents of a country and with the rest of the world for a given period (typically a year).
• The Current Account records exports and imports of goods and services and transfer payments.
• When exports are greater than imports, it is known as trade surplus and when imports are greater than exports, it is known as trade deficit and the balance of exports and imports of goods is known as the trade balance.

• Exchange rate is the rate at which one currency is exchanged with the other.
• Bilateral nominal exchange rates refer to exchange rates for one currency against another and they are nominal because they quote the exchange rate in terms of money, for example, one pound or dollar is equal to many rupees.
• The real exchange rate is often considered as a measure of a country’s international competitiveness.
• In a system of flexible exchange rates (also called floating exchange rates), the exchange rate is determined by the forces of market — demand and supply.
• Changes in the price of foreign exchange under the flexible exchange rates are referred to as currency depreciation or currency appreciation.
• Managed Floating Exchange Rate System is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part).
• Managed Floating Exchange Rate System, also known as dirty floating, is the system under which central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. Official reserve transactions are, therefore, not equal to zero.

Gold Standard System

• Under the Gold Standard system, each participant country is committed to guarantee the free convertibility of its currency into gold at a fixed price, which means that the residents have, at their disposal, a domestic currency which is freely convertible at a fixed price into another asset (gold) acceptable for all international payments.
• The gold standard system made it possible for each currency to be convertible into any other currency at a fixed price.
• In 1967, gold was removed by creating the Special Drawing Rights (SDRs) (also called as ‘paper gold’), in the IMF with the purpose to increase the stock of international reserves.

Close Economy Vs Open Economy

• In a closed economy, there are three sources of demand for domestic goods. The sources are as follows −
  • Consumption (C)
  • Government spending (G)
  • Domestic investment (I)
• Closed economy = C + G + I.
• On the other hand, in an open economy, exports and imports are the additional elements, considered to measure the economy.
• An increase in foreign income leads to increased exports. This thereby increases domestic output and improves the trade balance.

Reforms

Introduction

• 1991 was a landmark year in the history of Indian economy. There was a tectonic shift in the Indian economic policy (during this year).
• In 1991, India suffered great economic crisis, which was uncontrollable, the condition was worsening gradually; resultantly, the inflation of the prices of daily use commodities hit the people hard.

• As the foreign currency reserves went down, the balance of payment crisis was a major challenge for the country to deal with.
• The reason for this crisis was long standing decline in exports, since 1980. When we import some product (such as petroleum), we need to pay in dollars, which we earn through export of our products.
• On the other hand, government’s income was inadequate to address the issue; the revenue that the Government generated through taxation was inadequate.
• India borrowed a loan of $7 Billion from the International Bank for Reconstruction and Development (IBRD), i.e., the World Bank and the International Monetary Fund (IMF), on the condition to liberalise the economic policy and open doors for international trade in India.

Liberalization

• The period from the late 1980s to now witnessed significant reforms. The reforms can be categorized into two groups −
  • Stabilisation measures.
  • Structural reform policies.
• Stabilisation measures are short-term in nature and attempt to control the crisis situation by maintaining sufficient foreign exchange reserves.
• Structural reform policies are long-term policies that attempt to improve the overall economic condition by increasing the international competitiveness and removing the rigidities and other restraining obstacles.

• Under the liberalisation policy of 1991, there were many changes in the areas of licensing and procedures, import of technology, import of capital goods coupled with a reasonable rate of public investment and almost total protection to domestic industries from international competition through quantitative restrictions on imports as well as high tariff rates.
• The industrial licensing system was almost abolished except for some industries such as cigarettes, alcohol, hazardous chemicals, electronics, aerospace, drugs and pharmaceuticals and industrial explosives.
• Particular industries such as the defence equipment, atomic energy generation, and railway are kept exclusively under the public sector.
• There are some industries that have been provided the liberty to fix the prices for their products by the government.
• Financial sector, which includes banks, stock exchange operations, and foreign exchange market were to be regulated and controlled by Reserve Bank of India (RBI), but the policy brought in a change, wherein, many of the financial institutions have been given liberty to take NOT ALL, but some major financial decisions on their own.
• Many Foreign Institutional Investors (FII) including merchant bankers, pension funds, mutual funds, etc. are allowed to invest in the Indian financial market.
• Tax policies and public expenditure policies are collectively known as fiscal policy.
• Tax is categorized into two parts — Direct Tax and Indirect Tax.
• Direct taxes are taxes collected on the income of individuals as well as business enterprises. After liberalization, the share of direct tax is coming down.
• Taxes levied on goods and commodities are known as indirect tax.
• Foreign exchange market has also been reformed and this helps to resolve the crisis of balance of payments.
• Trade and investment policy reforms increased the international competitiveness of the industrial sector.
• To protect domestic products and industries, the government used to impose quantitative restrictions on imports by keeping the tariffs very high. This policy has also underwent reforms now.
• Import licensing was removed; however, it remained active for the hazardous and environmentally sensitive industries.
• Quantitative restrictions have been completely abolished from April 2001.
• Export duties have also been removed to increase the competitive position of Indian goods in the international market.

Privatisation

• Privatisation means opening the doors of the sectors and industries which were once preserved for the government. This also includes selling the government-owned enterprises to private companies.
• Government companies transformed into private companies either by −
  • Government’s withdrawal from the ownership and management, or,
  • Selling the public sector companies to private companies.
• Selling a part of the equity of government enterprises to the public is called Disinvestment.
• Besides, to improve the efficiency of certain public sector industries, government has vested on them, the autonomy to take managerial decisions. And, some of the industries, which are highly regarded have been awarded the status of Maharatnas, Navratnas, and Miniratnas.

• Maharatnas include Indian Oil Corporation Limited and Steel Authority of India Limited.
• Navratnas include Hindustan Aeronautics Limited and Mahanagar Telephone Nigam Limited.
• Miniratnas include Bharat Sanchar Nigam Limited, Airport Authority of India, and Indian Railway Catering and Tourism Corporation Limited.

Globalisation

Globalisation is a complex phenomenon, which was a result of the integration of world economy and trade interdependence.

• Because of advanced development of information technology, many of the services now are getting outsourced. For example −
  • Business Process Outsourcing (BPO)
  • Voice-based business process
  • Record keeping
  • Banking services
  • Accountancy
  • Film editing
  • Music recording
  • Book writing
  • Research and editing, etc.

• Globalization helped to promote many Indian companies in the international market. It led to Indian companies opening their branches in different countries of the world. For example, ONGC Videsh operates in 16 countries, Tata Steel operates in 26 countries, HCL in 31 countries.

World Trade Organization (WTO)

• WTO was established in 1995.
• It was preceded by GATT (General Agreement on Trade and Tariff), which was established in 1948, which had 23 member countries participating in it.
• It was a multilateral trade agreement established with the objective to offer equal opportunity to all countries in the international market for the trading.
• WTO agreement covers goods as well as services and intended to provide equal opportunity to all by removing the various tariff rates (in different countries) and non-tariff barriers.

• As a member of WTO, India also follows the WTO’s agreements.

After the Reform Period

• After the reform of 1991, agriculture sector witnessed a decline; there was a fluctuation in the industrial sector, and the service sector experienced a significant growth.
• Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) have increased from about USD 100 million (in 1990-91) to USD 467 (billion in 2012-13).
• Though under the policy of globalisation, international market is open for all and there are equal opportunities for all; however, some economists are of the opinion that it is more beneficial for the developed countries.
• Local industries of developing countries are also facing lot of problems, as they now have to compete with the companies in foreign countries.
• Developing countries still have no access to developed countries’ local markets.
• Indian government since 1991, sets the amount of disinvestment target every year; in 2013-14, the target was about Rs. 56,000 Crores and it has achieved target of only about Rs. 26,000 Crores.

Siricilla Tragedy − Power sector reforms has increased the power tariff, which has badly affected the workers working especially in small scale industries.

For example, Siricilla, a town in Telangana is widely known for its power loom textile industry. Here, wages of workers are directly linked with the amount of production. In such situations, power cuts have direct impact on workers’ wage. This often leads to the workers committing suicides.

Consumer Rights

Introduction

• All of us are consumers, as all of us go to the market and purchase products; this is irrespective of the fact that we buy salt for Rs. 20 or a smart television for Rs. 50,000.
• It is legal as well as moral duty of sellers to provide quality products to their consumers and, it is the right of the consumer to buy products of good quality.
• Various laws, rules, and regulations have been put into practice to protect consumer rights.

• Providing bad, tampered, adulterated, or duplicate product is a violation of consumer rights. This may lead to legal action and the seller/producer may have to pay a huge compensation amount.

Consumer Movements

• The consumer movement in India as a ‘social force’ originated with the necessity to protect and promote the interests of consumers against the unethical and unfair trade practices. This movement aims to fight bad practices such as −
  • Rampant food shortages.
  • Black marketing.
  • Adulteration of food and edible oil.
  • Hoarding, etc.
• The consumer rights were legally recognized after the enactment of the Consumer Protection Act, (COPRA) of 1986 by the Government of India.

Consumer’s Right

• COPRA governs all business conducts and ensures consumer’s rights.
• If a producer/seller acts wrongly and causes harm to any consumer, then the consumer can exercise his right to ask for compensation. And, if the seller is not ready to pay the compensation amount, the aggrieved consumer can file a lawsuit in consumer’s court.
• As per the law, all producers and sellers are liable to provide all details of respective products. For example, on a medicine bottle, you can find the manufacturing date, the composition, manufacture’s details, expiry date, etc. (as shown in the image given below).

• It is consumers’ right to have this information (right to be informed) of the product that they are buying.
• If a consumer finds that the medicine, he has been given by a chemist is already beyond the expiry date or is a duplicate one, then he can take legal action against the medicine seller.
• Government of India enacted the Right to Information (RTI) Act in 2005 to ensure citizen’s access to public information.
• Right to Information Act is a comprehensive set of rules and guidelines that ensure and provide all the (asked/required) information to the (respective) citizens about the functioning of the government departments.
• It is the duty of the respective department (where you put query) to provide the required information (that you asked) with a specific timeline; they cannot ignore your query.

Consumer’s Court

• The place you can file a case for redressal of consumer dispute are categorized into three levels −

• If your case is valued at less than 2 million and you are not satisfied with the DCDRF’s judgment; you can further appeal to the state level court and so on.
• As a consumer, you have to be well informed about your rights; for that you need to acquire the knowledge and skill and become a well-informed consumer.
• 24 December of every year is observed as ‘National Consumers’ Day’ as Consumer Protection Act of 1986 was enacted on this date.

Problems

• In spite of so many years of COPRA enactment, lakhs of people are not able to exercise their consumer rights; they are being exploited.
• Many of the consumers have no idea about their (consumer) right, but there are also many other reasons, such as corruption, faulty practices, negligence by the consumer, etc.
• On the other hand, at many places neither sellers give memo (receipt) of purchased goods nor do buyers (consumers) ask for that; receipt supports the lawsuit.
• It is indispensable to have the purchase receipt to file a lawsuit; it is a must to ask for the correct purchase receipt whenever you buy something.
• To overcome the situation, consumers need to update themselves and participate and fight for their rights.
• As a responsible consumer, one should also make others aware; this is the best way to spread the awareness among the masses.