DEFINITION of 'Inflation'

Inflation is the rate at which the general level of prices for goods and services is rising and,
consequently, the purchasing power of currency is falling. Central banks attempt to limit
inflation, and avoid deflation, in order to keep the economy running smoothly
some of the important measures to control inflation are as follows:
1. Monetary Measures 2. Fiscal Measures 3. Other Measures.
Inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand.
Inflation can, therefore, be controlled by increasing the supplies of goods and services and
reducing money incomes in order to control aggregate demand.
The various methods are usually grouped under three heads: monetary measures, fiscal measures
and other measures.
1. Monetary Measures:
Monetary measures aim at reducing money incomes.
(a) Credit Control:
One of the important monetary measures is monetary policy. The central bank of the country
adopts a number of methods to control the quantity and quality of credit. For this purpose, it
raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a
number of selective credit control measures, such as raising margin requirements and regulating
consumer credit. Monetary policy may not be effective in controlling inflation, if inflation is due
to cost-push factors. Monetary policy can only be helpful in controlling inflation due to demandpull factors.
(b) Demonetisation of Currency:
However, one of the monetary measures is to demonetize currency of higher denominations.
Such a measures is usually adopted when there is abundance of black money in the country.
(c) Issue of New Currency:
The most extreme monetary measure is the issue of new currency in place of the old currency.
Under this system, one new note is exchanged for a number of notes of the old currency. The
value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an
excessive issue of notes and there is hyperinflation in the country. It is a very effective measure.
But is inequitable for its hurts the small depositors the most.
2. Fiscal Measures:
Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented
by fiscal measures. Fiscal measures are highly effective for controlling government expenditure,
personal consumption expenditure, and private and public investment.

The principal fiscal measures are the following:

(a) Reduction in Unnecessary Expenditure:
The government should reduce unnecessary expenditure on non-development activities in order
to curb inflation. This will also put a check on private expenditure which is dependent upon
government demand for goods and services. But it is not easy to cut government expenditure.
Though this measure is always welcome but it becomes difficult to distinguish between essential
and non-essential expenditure. Therefore, this measure should be supplemented by taxation.
(b) Increase in Taxes:
To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes
should be raised and even new taxes should be levied, but the rates of taxes should not be so high
as to discourage saving, investment and production. Rather, the tax system should provide larger
incentives to those who save, invest and produce more.
Further, to bring more revenue into the tax-net, the government should penalise the tax evaders
by imposing heavy fines. Such measures are bound to be effective in controlling inflation. To
increase the supply of goods within the country, the government should reduce import duties and
increase export duties.
(c) Increase in Savings:
Another measure is to increase savings on the part of the people. This will tend to reduce
disposable income with the people, and hence personal consumption expenditure. But due to the
rising cost of living, people are not in a position to save much voluntarily.
Keynes, therefore, advocated compulsory savings or what he called deferred payment where
the saver gets his money back after some years. For this purpose, the government should float
public loans carrying high rates of interest, start saving schemes with prize money, or lottery for
long periods, etc. It should also introduce compulsory provident fund, provident fund-cumpension schemes, etc. All such measures increase savings and are likely to be effective in
controlling inflation.
(d) Surplus Budgets:
An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the
government should give up deficit financing and instead have surplus budgets. It means
collecting more in revenues and spending less.

(e) Public Debt:

At the same time, it should stop repayment of public debt and postpone it to some future date till
inflationary pressures are controlled within the economy. Instead, the government should borrow
more to reduce money supply with the public.
Like monetary measures, fiscal measures alone cannot help in controlling inflation. They should
be supplemented by monetary, non-monetary and non-fiscal measures.

3. Other Measures:
The other types of measures are those which aim at increasing aggregate supply and reducing
aggregate demand directly.
(a) To Increase Production:
The following measures should be adopted to increase production:
(i) One of the foremost measures to control inflation is to increase the production of essential
consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.
(ii) If there is need, raw materials for such products may be imported on preferential basis to
increase the production of essential commodities,
(iii) Efforts should also be made to increase productivity. For this purpose, industrial peace
should be maintained through agreements with trade unions, binding them not to resort to strikes
for some time,
(iv) The policy of rationalisation of industries should be adopted as a long-term measure.
Rationalisation increases productivity and production of industries through the use of brain,
brawn and bullion,
(v) All possible help in the form of latest technology, raw materials, financial help, subsidies, etc.
should be provided to different consumer goods sectors to increase production.
(b) Rational Wage Policy:
Another important measure is to adopt a rational wage and income policy. Under hyperinflation,
there is a wage-price spiral. To control this, the government should freeze wages, incomes,
profits, dividends, bonus, etc.
But such a drastic measure can only be adopted for a short period as it is likely to antagonise
both workers and industrialists. Therefore, the best course is to link increase in wages to increase
in productivity. This will have a dual effect. It will control wages and at the same time increase
productivity, and hence raise production of goods in the economy.
(c) Price Control:
Price control and rationing is another measure of direct control to check inflation. Price control
means fixing an upper limit for the prices of essential consumer goods. They are the maximum
prices fixed by law and anybody charging more than these prices is punished by law. But it is
difficult to administer price control.
(d) Rationing:
Rationing aims at distributing consumption of scarce goods so as to make them available to a
large number of consumers. It is applied to essential consumer goods such as wheat, rice, sugar,
kerosene oil, etc. It is meant to stabilise the prices of necessaries and assure distributive justice.
But it is very inconvenient for consumers because it leads to queues, artificial shortages,
corruption and black marketing.

Concepts of National Income

There are various concepts of National Income. The main concepts of NI are: GDP, GNP, NNP,
NI, PI, DI, and PCI. These different concepts explain about the phenomenon of economic
activities of the various sectors of the various sectors of the economy.
Gross Domestic Product (GDP)
The most important concept of national income is Gross Domestic Product. Gross domestic
product is the money value of all final goods and services produced within the domestic territory
of a country during a year.
Algebraic expression under product method is,
GDP=(P*Q)
where,
GDP=Gross Domestic Product
P=Price of goods and service
Q=Quantity of goods and service
denotes the summation of all values.
According to expenditure approach, GDP is the sum of consumption, investment, government
expenditure, net foreign exports of a country during a year.
Algebraic expression under expenditure approach is,
GDP=C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M)=Export minus import

GDP includes the following types of final goods and services. They are:
1. Consumer goods and services.
2. Gross private domestic investment in capital goods.
3. Government expenditure.
4. Exports and imports.
Gross National Product (GNP)
Gross National Product is the total market value of all final goods and services produced
annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the
flow of goods and services at market value resulting from current production during a year in a
country including net factor income from abroad. The GNP can be expressed as the following
equation:
GNP=GDP+NFIA (Net Factor Income from Abroad)
or, GNP=C+I+G+(X-M)+NFIA
Hence, GNP includes the following:
1. Consumer goods and services.
2. Gross private domestic investment in capital goods.
3. Government expenditure.
4. Net exports (exports-imports).
5. Net factor income from abroad.
Net National Product (NNP)

Net National Product is the market value of all final goods and services after allowing for
depreciation. It is also called National Income at market price. When charges for depreciation are
deducted from the gross national product, we get it. Thus,
NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M)+NFIA-Depreciation
National Income (NI)
National Income is also known as National Income at factor cost. National income at factor cost
means the sum of all incomes earned by resources suppliers for their contribution of land, labor,
capital and organizational ability which go into the years net production. Hence, the sum of the
income received by factors of production in the form of rent, wages, interest and profit is called
National Income. Symbolically,
NI=NNP+Subsidies-Interest Taxes
or,GNP-Depreciation+Subsidies-Indirect Taxes
or,NI=C+G+I+(X-M)+NFIA-Depreciation-Indirect Taxes+Subsidies
Personal Income (PI)
Personal Income i s the total money income received by individuals and households of a country
from all possible sources before direct taxes. Therefore, personal income can be expressed as
follows:
PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-Social Security
Contribution+Transfer Payments
Disposable Income (DI)
The income left after the payment of direct taxes from personal income is called Disposable
Income. Disposable income means actual income which can be spent on consumption by
individuals and families. Thus, it can be expressed as:

DI=PI-Direct Taxes
From consumption approach,
DI=Consumption Expenditure+Savings
Per Capita Income (PCI)
Per Capita Income of a country is derived by dividing the national income of the country by the
total population of a country. Thus,
PCI=Total National Income/Total National Population

3) SEZs
Special Economic Zone schemes provides for setting up of SEZs, which have been introduced by the
Indian Government with the basic idea of providing the world class infrastructure and other facilities
which are required for successful growth of the business and thereby growth of the economy. These are
treated as they are separate islands outside India for Custom purposes. SEZs are grown engines that can
boost manufacturing, augment exports and generate employment. It is pertinent to note that SEZ are
allowed to be set up for manufacturing of goods, rendering of services and trading of goods. Generally,
there are three types of SEZs (a) Multi-product SEZ should have an area of 1000 hectare or more but less
than 5000 hectares, (b) Sector Specific SEZ should have area of around 10 hectares, (c) SEZ for Free
Trade and Warehousing can have area of 40 hectares or more. It is also worthwhile to mention that the
provisions of Central Excise Act, 1944 is not applicable on any manufacturing in SEZ as specifically
mentioned in Section 3(1)(a) of the Act. SEZ are regulated by the Special Economic Zones Act, 2005
which came into effect from 10th February 2004.Setting Up of a new SEZ
For a developing country like India, it is very important to prioritize the industrial operations for the faster
development of the economy and with such initiatives only it can alleviate the problems of unemployment
which is a plague to the Indian Economy. Despite having the gift of the largest reserves of natural
resources and rich culture, our economy is lagging behind due to staggering Industrial Growth. In order to
address the above mentioned issues, Government of India has introduced the concept of SEZ in India by
passing SEZ Act, 2005.
A Board of Approval has been constituted by the Central Government u/s 8(1) of the SEZ Act, vide
Notification dated 10-02-2006. The Additional Secretary to the GOI is the chairperson of the Board of
Approval. The Board and the Unit Approval Committee of the Board shall take up all the issues
pertaining to setting up of SEZ.
The Letter for approval of the unit in SEZ is sent to the Approval Committee and once approval is granted
then the Letter of Approval shall be issued by the Development Commissioner in Form G which shall be
valid for a period of five years & it can be extended for five years at a time.
Overriding effect of SEZ Act

It is pertinent to note that the SEZ Act has an overriding effect over anything inconsistent contained in
any other law or instrument having force of law.
Other Important Issues
The Custom Officers have jurisdiction over the units located in SEZ to issue notices or take actions as
held by Honble Gujarat High Court in case of UOI vs. Oswal Agrocomm Pvt Ltd (2011) 268 ELT 21.
The unit shall issue a Bond-cum-legal undertaking in Form H and the Developer/Co-Developer shall
issue a Bond-cum-legal undertaking in Form D which shall be accepted by the Development Officer and
the Specified Officer. The Bond should be monitored by the SEZ unit itself and if any short fall is
observed then it should furnish an additional bond on its own. Such bond is given to cover duties leviable
on import or DTA procured raw materials for a period of three months. However, a bond for a longer
period such as one year or five year can also be furnished as per MC&I(DC) SEZ Instruction No. 72
dated 30-10-2010.
While setting up a unit, it should be kept in mind that the value of the old plant and machineries should
not exceed 20% of the total value of plant & machinery for availing benefit under the Income Tax Act,
1961.
Exit of SEZ (De-Bonding)
The unit is required to pay customs duty on the imported machinery on the basis of depreciated value as
per Rule 49(1) of the SEZ Rules (provision similar to Rule 3(5A) of CCR04) wherein it has been stated
that depreciation rate shall be 4% per quarter in the first year, 3% per quarter in the second and third year,
2.5% per quarter in the fourth and fifth year and 2% per quarter in the subsequent years. In case of
computer peripherals, 10% per quarter in the first year, 8% per quarter in the second year, 5% per quarter
in third year and 1% per quarter in fourth and fifth year.
Now a question arises, whether depreciation is allowed till the date of application or date of payment. In
this regard, reliance can be placed on the decision of Honble CEGAT in case of CCE vs. Solitaire
Machine Tools (2003) 152 ELT 384. The same view has been re-iterated in MF(DR) Circular No
14/2004-Cus dated 13-02-2004.
Supplies to SEZ and Supplies from SEZ
It is pertinent to note that the supplies made by the Domestic Tariff Area (DTA) to SEZ are exports as
held in case of Shri Bajrang Power & Ispat Limited (2012) 282 ELT 108. The suppliers to SEZ are
entitled to many benefits such as (a) Duty Drawback u/s 75 of the Customs Act (b) DEPB Benefit in lieu
of Duty Drawback benefit MF(DR) Circular No 6/2005-Cus (c) Rebate u/r 18 of Central Excise Rules
(d) EPCG Scheme even if payment is received in Indian Currency (Para 5.7.2 of HOP Vol 1) (e)
DFIA/FPS schemes are available.
Further, in case of Tiger Steel Engineering (2010) 29 STT 25, Honble Tribunal held that supplies made to
SEZ are not eligible for benefit under Rule 5 of CCR04. However, the said view of the Honble Tribunal
would be contrary to the purpose of setting up of SEZ. Further, as per Rule 6(6) supports the view that the
intention of the legislature is to make the supplies made to SEZ zero rated.
Procedure
The supplier should prepare a bill of export treating the supply to SEZ as export. The Duty Drawback
shall be granted to the supplier on the basis of the Disclaimer certificate given by the DTA Unit
MF(DR) Circular No 24/2003-Cus. Further, in a plethora of judicial pronouncements it has been held that
even if bill of export is not submitted, the substantive benefit of rebate cannot be denied if evidence of
receipt of material in SEZ in Form ARE-1 is available Shree Parvati Metal Private Limited (2013)
290 ELT 638. For claiming duty drawback, the procedure specified in Circular No. 43/2007-Cus dated
05-12-2007 wherein it has been stated that JC/DC/AC is the Specified Officer to whom the claim for
duty drawback can be filed. SEZ or SEZ unit should file the claim with him. If duty drawback is to be
claimed by the DTA unit, then disclaimer should be obtained from SEZ or SEZ unit and then submit it to
the Jurisdictional Commissionerate.
During export the DTA unit should file Bill of Export along with Invoice and after assessing the BOE by
the Customs Officer, the DTA unit can clear the goods without payment of duty under ARE-1 procedure
which shall be submitted to the Central Excise Super-Intendent of DTA unit within 45 days. It is

important to note that export duty is not payable in case of supply made by DTA to SEZ unit Essar Steel
(2010) 232 ELT 617 Gujarat High Court.
There is no restriction on sale by SEZ to DTA units but it should achieve positive NFE within five years
of commercial production as per MC&I(DC) SEZ Instruction No. 70 dated 09-11-2010.
SEZ schemes have so far been a successful initiative by the government of India in the path of
development of the country.

The main objectives of the SEZ Act are:

(a) generation of additional economic activity
(b) promotion of exports of goods and services;
(c) promotion of investment from domestic and foreign sources;
(d) creation of employment opportunities;
(e) development of infrastructure facilities;

Incentives and facilities offered to the SEZs

The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs,
including foreign investment include:

Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units

100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for
first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.

Exemption from minimum alternate tax under section 115JB of the Income Tax Act.

External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity
restriction through recognized banking channels.

Exemption from Central Sales Tax.

Exemption from Service Tax.

Single window clearance for Central and State level approvals.

Exemption from State sales tax and other levies as extended by the respective State Governments.
The major incentives and facilities available to SEZ developers include:-

Exemption from customs/excise duties for development of SEZs for authorized operations approved by the
BOA.

Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years
in 15 years under Section 80-IAB of the Income Tax Act.

Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.

Exemption from dividend distribution tax under Section 115O of the Income Tax Act.

Exemption from Central Sales Tax (CST).

Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

BASIS FOR
COMPARISON
Meaning

MONEY MARKET

CAPITAL MARKET

A segment of the financial

A section of financial

market where lending and

market where long term

borrowing of short term

securities are issued and

securities are done.

traded.

Nature of Market

Informal

Formal

Financial

Treasury Bills, Commercial

Shares, Debentures, Bonds,

instruments

Papers, Certificate of

Retained Earnings, Asset

Deposit, Trade Credit etc.

Securitization, Euro Issues

etc.

Risk Factor

Low

Comparatively High

BASIS FOR
COMPARISON

MONEY MARKET

CAPITAL MARKET

Time Horizon

Within a year

More than a year

Merit

Increases liquidity of funds

Mobilization of Savings in

in the economy.

the economy.

Less

Comparatively High

Return on
Investment

Definition of Money Market

An unorganized arena of banks, financial institutions, bill brokers, money
dealers, etc. where trading on short term financial instruments is
being concluded is known as Money Market. These markets are also known by
the name wholesale market.
Trade Credit, Commercial Paper, Certificate of Deposit, Treasury bills are some
examples of the short term debt instruments. They are highly liquid (cash
equivalents) in nature and that is why their redemption period is limited to one
year. They provide a low return on investment, but they are quite safe trading
instruments.

Money Market is unsystematic market and so the trading is done off exchange,
i.e. Over The Counter (OTC) between two parties by using phones, email, fax,
online, etc. It plays an important role in the circulation of short term funds in the
economy. It helps the industries to fulfill their working capital requirement.

Definition of Capital Market

A type of financial market where the government or company securities are
created and traded for the purpose of raising long term finance to meet the
capital requirement is known as Capital Market.
The securities which are traded includes stocks, bonds, debentures, euro issues,
etc. whose maturity period is not limited up to one year or sometimes the
securities are irredeemable (no maturity). The market plays a revolutionary role
in circulating the capital in the economy between the suppliers of money and the
users. The Capital Market works under full control of Securities and Exchange
Board to protect the interest of the investors.
The Capital Market includes both dealer market and auction market. It is broadly
divided into two major categories: Primary Market and Secondary Market.
Primary Market: A market where fresh securities are offered to the
public for subscription is known as Primary Market.
Secondary Market: A market where already issued securities are traded
among investors is known as Secondary Market.

Key Differences Between Money Market and Capital

Market
The following are the major differences between money market and capital
market

1. The place where short term marketable securities are traded is known as
Money Market. Unlike Capital Market, where long term securities
are created and traded is known as Capital Market.
2. Capital Market is well organized which Money Market lacks.
3. The instruments traded in money market carry low risk, hence they are
safer investments, but capital market instruments carry high risk.
4. The money market instruments are rich in liquidity. Conversely, the
instruments of capital market are not that much liquid.
5. Capital Market instruments give higher returns as compared to money
market instruments.
6. Redemption of Money Market instruments is done within a year, but
Capital Market instruments have a life of more than a year as well as some
of them are perpetual in nature.

Essay on WTO: Objectives, Principals and Functions!

The World Trade Organisation (WTO) is the only body making global
trade rules with binding effects on its Members. It is not only an

institution, but also a set of agreements. The WTO regime is known

as the rules-based multilateral trading system. The history of the
Organisation dates back to 1947, when the General Agreement on
Tariffs and Trade (GATT), was set up to reduce tariffs, remove trade
barriers and facilitate trade in goods.
Over the years, GATT evolved through eight rounds of multilateral
trade negotiations, the last and most extensive being the Uruguay
Round (1986-1994). The WTO came into being in Marrakesh on 1
January 1995, following the conclusion of the Uruguay Round. GATT
then ceased to exist, and its legal texts were incorporated into the
WTO as GATT 1994.

Objectives of the WTO:

The agreement establishing WTO reiterated the objectives of the
GATT.
More specifically, the WTO outlined its objectives to include
the following under its scope:
i. Raise standard of living and incomes by ensuring. (i) Full
employment, (ii) expanding production and trade, and (iii) optimal
use of worlds resources;
ii. Adopt the idea of sustainable development in relation to the
optimal use of worlds resources, i.e. reinforce the need to protect
and preserve the environment in a manner consistent with the
various levels of national economic development;

iii. Recognise the need for positive efforts to ensure that developing
countries secure a better share of growth in international trade;
iv. To demolish all hurdles to an open world trading system and
usher in international economic renaissance because the world
trade is an effective instrument to foster economic growth;

Principals of the WTO:

In its broad perspective, the WTO was to strive at creating a liberal
and open trading environment by which enterprises could trade
under conditions of fair and undistorted competition.
Towards the achievement of this, the four principles that
were laid down to guide the trading rules of its members are
as follows:
i. Most Favoured Nation (MFN) Treatment:
The principle of MFN treatment laid that tariffs and regulations must
be applied to imports or exports without discrimination among
members. In other words, no member country was to be accorded a
treatment of a favoured nation;
ii. National Treatment:
It prevents discrimination between imported products and
equivalent domestically produced goods, especially in levying
internal taxes and domestic regulations;
iii. Protection through Tariffs:

While advocating liberal trade, the WTO recognises that some

members may need to protect their domestic production against
foreign competitors. The underlying principle was, however, that
such protections through tariffs must be kept at low levels in what
was called as bound tariff framework;
iv. Bound Tariffs:
The principle of bound tariff advises the member countries to
reduce and gradually eliminate protection to domestic production.
The reduction and ultimate phase-outs of tariffs was meant to
provide the cushion time required for gaining competitive strength
and the tariffs were to be phased out firmly in a committed time
frame.

Functions of the WTO:

The WTO is meant to perform the following functions:
i. Administer through various councils and committees, the 29
agreements contained in the final Act of the Uruguay round of world
trade talks, plus a number of plurilateral agreements, including
those on government procurement;
ii. Oversee the implementation of the significant tariff cuts (average
40 per cent) and reduction of non-tariff measures agreed to in the
trade negotiations;
iii. Act as a watchdog of international trade by regularly examining
the trade regimes of individual members;

iv. Ensure that members notify in detail various trade measures and
statistics, which are to be maintained by the WTO in a large
database;
v. Provide several conciliatory mechanisms for arriving at an
amicable solution to trade conflicts among members;
vi. Resolve trade disputes that cannot be solved through bilateral
talks by adjudication in the WTO dispute settlement court;
vii. Act as a management consultant for world trade by having its
economists keep a close watch-on the pulse of the global economy
and provide inputs to WTO by studies conducted on the main issues
of the day; and
viii. Assist developing countries through its secretariat to implement
the Uruguay round agreements through a newly-established
development division and a technical co-operation and training
division.
The WTO is, thus, a forum where countries continuously negotiate
the exchange of trade concessions and trade restrictions all over the
world. The WTO has a substantial agenda for further negotiations in
many areas, notably certain services sectors.