UNIT – V
Business cycles – National income, monetary and fiscal policy – Public finance. TRIM‟s- Intellectual Property rights – TRIP‟s – Industrial Sickness – causes –remedies
2. UNIT – V
Business cycles – National income, monetary and fiscal
policy – Public finance. TRIM‟s- Intellectual Property rights
– TRIP‟s – Industrial Sickness – causes –remedies
3. What is a Business Cycle?
A business cycle is a cycle of fluctuations in the Gross
Domestic Product (GDP) around its long-term natural
growth rate. It explains the expansion and contraction
in economic activity that an economy experiences over
time.
Character tics
It occurs Periodically
It is all embracing
It is wave
Process is cumulative & self reinforcing
The cycles will be similar but not identical
5. National Income
National income is an uncertain term which is used
interchangeably with national dividend, national output
and national expenditure. On this basis, national income
has been defined in a number of ways. In common
parlance, national income means the total value of goods
and services produced annually in a country.
Definition
According to A.C. Pigou “National income is that part of
objective income of the community, including of course
income derived from abroad which can be measured in
money.”
6. Concepts of National Income
A)Gross Domestic Product (GDP):
GDP is the total value of goods and services produced
within the country during a year. This is calculated at
market prices and is known as GDP at market prices.
Three different ways to measure GDP:
Product Method
Income Method
Expenditure Method.
7. (B) GDP at Factor Cost:
GDP at factor cost is the sum of net value added by all
producers within the country. Since the net value added
gets distributed as income to the owners of factors of
production, GDP is the sum of domestic factor incomes
and fixed capital consumption
(i) Compensation of employees
(ii) Operating surplus which is the business profit of both
incorporated and unincorporated firms.
(iii) Mixed Income of Self- employed.
8. C) Net Domestic Product (NDP)
(D) Nominal and Real GDP
E) GDP Deflator
F) Gross National Product (GNP):
Three Approaches to GNP
1. Income Method to GNP
2. Expenditure Method to GNP
3. Value Added Method to GNP:
(G) GNP at Market Prices
(H) GNP at Factor Cost
(I) Net National Product (NNP):
(J) NNP at Market Prices:
(K) NNP at Factor Cost:
(L) Domestic Income:
(M) Private Income:
N) Personal Income
9. (O) Disposable Income:
(P) Real Income:
(Q) Per Capita Income
IMPORTANCE OF NATIONAL INCOME
1. For the Economy
2. National Policies
3. Economic Planning
4. Economic Models
5. Research
6. Per Capita Income
7. Distribution of Income
10. METHODS OF MEASURING NATIONAL INCOME:
(1) Product Method
(2) Income Method
(3) Expenditure Method
(4) Value Added Method
12. MONETARY POLICY
Monetary policy is the macroeconomic policy laid down by
the central bank. It involves management of money supply
and interest rate and is the demand side economic policy
used by the government of a country to achieve.
Definition: Monetary Policy refers to the credit control
measures adopted by the central bank of a country.
Monetary policy “as policy employing central bank’s
control of the supply of money as an instrument for
achieving achieves of general economic policy.”
13. OBJECTIVES OF MONETARY POLICY
The following are the principal objectives of monetary
policy:
Full Employment
Price Stability
Economic Growth
Balance of Payments
Exchange Rate Stability
Neutrality of Money
Equal Income Distribution
14. TYPES OF MONETARY POLICY
Monetary policy design changes as per the goals set for the
monetary policy and the emerging economic scenario. The
monetary policy is characterized as
Expansionary Monetary Policy
Contractionary Monetary Policy
Countercyclical Monetary Policy
Rule Based Monetary Policy
Discretionary Monetary Policy
16. INSTRUMENTS OF MONETARY POLICY • Credit control
is an important tool used by Reserve Bank of India, a major
weapon of the monetary policy used to control the demand
and supply of money in the economy
Quantitative Instruments
Bank Rate: The bank rate, also known as the Discount
Rate, is the oldest instrument of monetary policy. Bank
rate is the rate at which the RBI discounts – or, more
accurely.
Open market Operations: open market operations are
the means of implementing monetary policy by which a
central bank controls its national money supply by buying
and selling government securities or other financial
instrument.
17. Variations in the Reserve Requirement
The reserve bank also uses the method of variable reserve
requirements to control credit in India. By changing the
ratio, The reserve bank seeks to influence the credit
creation power of the commercial banks.
Repo Rate and Reserve Repo Rate
whenever the banks have any shortage of funds they can
borrow it from RBI. • Repo rate is the rate at which banks
borrow rupees from RBI.
Liquidity Adjustments Facility:
It is a cool, used in monetary policy that allows banks to
borrow money through repurchase agreements. This
arrangement allows banks to respond to liquidity pressures
and is used by governments to assure basic stability in the
fanancial markets
18. Qualitative Instruments
Rationing of credit: Credit rationing is a method of
controlling and regulating the purpose for which credit is
granted by commercial bank. It aims to limit the total amount
of loans and advances granted by commercial banks.
Margin Requirements: Margin is the difference b/w the
market value of a security and its maximum loan value.
Marginal requirement of loan can be increased or decreased to
control the flow of chart.
Publicity: RBI uses media for the publicity of its views on the
current market condition and its directions that will be required
to be implemented by the commercial banks to control the
unrest.
Regulation of Consumer Credit: If there is excess demand for
certain consumer durable leading to their high prices, central
bank can reduce consumer credit by increasing down payment,
and reducing the number of instalments of repayment of such
credit.
19. FISCAL POLICY
Fiscal Policy is a part of macro economics.
This policy is also known as budgetary policy.
One major function of the government is to stabilize the
economy.
Current indian govt wants to achieve fiscal deficit target by
not reducing expenditure but increasing tax collection.
Meaning
• The word fisc means ‘state treasury’ and fiscal policy
refers to policy concerning the use of ‘state treasury’ or the
government finances to achieve the macroeconomic goals.
20. Fiscal policy involves the decisions that a government
makes regarding collection of revenue, through taxation
and about spending that revenue.
It is sister strategy to monetary policy through which a
central bank influences a nation’s money supply.
Objectives of Fiscal Policy
1. Development by effective mobilisation of resources
2. Reduction in inequalities of income and wealth
3. Price stability and control of inflation
4. Employment generation
5. Reducing the deficit in the balance of payment
6. Increasing national income
7. Development of infrastructure
21. Instruments of fiscal Policy
Instruments
Budget Taxation
Public
expenditure
Public debt
22. Budget
“A Budget is a detailed plan of operations for some specific future period”
Budget is presented by the finance minister of India.
Budget is also known as Annual Financial Statement of the year
Total Expenditure has accordingly been estimated at Rs.17,77,477 crore in
2015-16
The requirements for expenditure on Defence, Internal Security and other
necessary expenditures are adequately provided.
Taxation
Direct Tax
• Individual Income Tax & Corporate Tax. • Wealth tax @ 2%
Indirect Tax
• Central excise (a tax on manufacture goods) • VAT @ 12.5% • Service Tax @
14% • Custom Duty
Public Expenditure
Public expenditure is spending made by the government of a country on
collective needs and wants such as pension, provision, infrastructure, etc.
Public expenditure is an important component of aggregate demand.
Public expenditure include Revenue expenditure and capital expenditure.
23. Public Debts
“ public debt is defined as any money owned by a
government agency”
Internal borrowings
Borrowings from the public means of treasury bills and
govt. bonds.
Borrowings from the central bank
External borrowings
• Foreign investment
• International organizations like World Bank &IMF
• Market borrowings
24. TRIMS
TRIMS are rules that are applicable to the domestic regulations a country applies to
foreign investors, often as part of an industrial policy.
TRIMS- The Agreement on Trade-Related Investment Measures (TRIMs) are rules
that are applicable to the domestic regulations a country applies to foreign investors,
often as part of an industrial policy.
TRIPS
TRIPS- The Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) is an international legal agreement between all the member nations of the
World Trade Organization (WTO). It sets down minimum standards for the
regulation by national governments of many forms of intellectual property (IP) as
applied to nationals of other WTO member nations.[TRIPS was negotiated at the end
of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT)
between 1989 and 1990 and is administered by the WTO.
TRIPS is an international legal agreement between all the member nations of the
World Trade Organization
25. INDUSTRIAL SICKNESS
Meaning
Industrial sickness usually refers to a situation when an
industrial firm performs poorly, incurs losses for several
years and often defaults in its debt repayment obligations.
A sick industrial unit may be defined as one when it fails
to generate surplus on a continuous basis and depends on
frequent infusion of external funds for its survival.
An industrial unit tends to show signs of financial distress
starting with :
Short term liquidity problems
Revenue losses
Operating losses
Moving in the direction of over use of external credit.
26. Which type of units are sick ?
To a Layman
A sick unit is one which is not healthy.
To an investor
It is one which is not giving dividends.
To a Banker
It is a unit which has incurred cash losses in the previous
years and is about to repeat the same performance in
current and following years.
To an Industrialist
It is unit which is making losses and about to close
27. Definition
According to Reserve Bank of India
A sick unit is that which has incurred a cash loss for one
year and is likely to continue incurring losses for the
current year as well as in the following year and
The unit has an imbalance in its financial structure. such
as, current ratio is less than 1: 1 and there is worsening
trend in debt-equity ratio.
28. Definition
According to Companies Act, 2002 Sick Industrial
Company means an industrial company which has
i) The Accumulated losses in any financial year equal to 50
per cent or more of its average net worth during four years
immediately preceding such financial year or
ii) Failed to repay its debts within any three consecutive
quarters on demand made in writing for its repayment by a
creditor or creditors of such company.
29. Features
(1) Socio-economic problem:
Industrial sickness is a serious socio-economic problem,
which is result of unplanned industrial growth. It is a
universal problem.
(2) Outcome of various causes:
Industrial sickness is the net result of variety of financial,
technical, managerial, personnel and marketing causes
faced by industrial units.
(3) Visible symptoms:
Industrial sickness is visible by various symptoms such as
financial difficulties, low profitability, inability to pay
interest and loan instalments.
30. (4) Serious consequences:
The consequences of industrial sickness on employees,
consumers, investors, management and the national
economy are serious. In addition, banks and term lending
institutions come in difficulties due to industrial sickness.
(5) Gradual process:
Industrial sickness takes place in a gradual manner and not
suddenly/overnight. Various stages are involved in this
process. They include normal unit tending towards
sickness, beginning of sickness and confirmed sickness
with normal features. Preventive measures during
incipient sickness are useful for avoiding sickness.
31. Causes of Industrial Sickness
Causes of Industrial Sickness
Internal Causes External Causes
32. Internal Causes
1. Technical feasibility:
a) Inadequate Technical know-how
b) Outdated production process
2. Economic viability:
a) High cost of inputs
b) Break even point too high
c) Unduly large investment in fixed assets
d) Under-estimation of financial requirements
3. Production management:
a) Poor capacity utilisation
b) High wastage
c) Inappropriate product-mix
d) Inadequate maintenance and replacement
33. .4)Labour management:
a)Poor labour productivity
b) Excessive manpower
c) Lack of trained/skilled labour
d) Excessively high wage structure
5. Marketing management:
a)Lack of market research and market feedback
b) Defective pricing policy
c) Dependence on limited number of customers
6. Financial management:
a) Inadequate working capital
b) Deficiency of funds
7. Administrative management:
a)Excessive expenditure on R & D
b) Incompetent management
c) Lack of timely diversification
34. External Causes
1)Infrastructural bottlenecks:
a)Irregular supply of critical raw materials
b) Transport bottlenecks
c) Chronic power shortage
2. Government controls and policies:
a)Government price controls
b) Abrupt change in government policies
c) Fiscal duties
3. Market Constraints:
a) Market saturation
b) Revolutionary technological advances rendering one’s products
obsolete
4. Extraneous factors:
a)Natural calamities
b) Political situation
c) Sympathetic strikes
35. PREVENTION
Prevention of Sickness by Owners and Management As
prevention of sickness is concerned, the essentials are
obvious: competent management of various functions
like general management, marketing, operations,
personnel, and finance; and a good performance
reporting System designed to provide top
management/owners timely information on critical
parameters such as sales, production, profits, cost
variance, profit variance, etc.
36. REMEDIES
The effective measures which may be taken for revival of
sick units are technical help, professional counseling and
improved management. Also, the role of professionals
and experienced management becomes more important
in times of sickness.
Steps taken by banks:-
giving adequate working capital when there is a
shortage.
recovery of interest reduced rate.
defining the special cell in the RBI.
arrange the special committee of state level in the local
branch for link between financial institution and
government agency.
37. REMEDIES
The Sick Industrial Companies (Special Provisions) Bill,
1997, passed by Lok Sabha , introduced encouraging
changes. It suggested that a time bound procedure was to
be adopted within which the scheme has to be
sanctioned and BIFR would play the role of a mediator
and not a court.
The industrial investment bank of India
– set up the IRCI (industrial reconstruction corporation of
India.)
- convert IRCI into IRBI in March 20 ,1985
- convert IRBI into IIBI in march 27, 1997
38. REMEDIES
Technical obsolescence and financial mismanagement
are also important factors that lead to industrial sickness.
As per the new provisions, an opportunity will be given to
get an unanimous consent to a scheme from all
concerned, failing which secured creditors will attempt to
form a scheme and, if all this fails, the undertaking would
be sold off. Only if it is not possible to do that, the
BIFR(Board of Industrial And Finance Reconstruction)
may order winding up of the company.
