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Case Studies:

Economics for Managers

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CONTENTS

1.	Metamorphosis of the Indian Economy	5
2.	Monetization of Gold	6
3.	Fermium to boost Consumer Surplus	7
4.	Death of Dumb Phones	8
5.	Coal Mining in a Hamletian Dilemma	9
6.	The Nose-diving Indian Aviation Industry	10
7.	Oligopoly Tactics	12
8.	Trade Union and Collective Bargaining	13
9.	Speculative demand for gold in India	14
10.	Capital budget of Oil Companies Slashed Worldwide	16
11.	Skill India Scheme to Boost Employment Policy in India	17
12.	GDP at Market Price: Comprehensive Measurement of National Income	19
13.	MGNREGA Raised Fiscal Deficit	20
14.	Budget 2015: Revolutionizing Supply-side Economics	22
15.	Net Tax Revenue an Edge in Fiscal Policy of Government	24
16.	Open Market Operations	26
17.	Role of Central bank in controlling Inflation	28
18.	Global Interest Rates Decreasing to Increase the Money supply	30
19.	Stabilizing India‟s BOP	32
20.	Understanding Consumer Confidence Index	33
21.	Indian Economy – Road to Recovery	34
22.	Information Technology (IT) Vision for Indian Railways	35

iii

Introduction to the Case Study

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	1		Metamorphosis of the Indian Economy

In the post-independence era, Indian economy adopted a socialistic pattern of society and initiated economic

policies that are pro-poor. Planning Commission played a pivotal role as the policy-maker for the central and state governments by formulating the Five-Year Plans (the blue print of government‟s play book). In a

command economy, such a role of the Planning Commission was justified. The initiation of economic reforms in 1991 had significantly reduced the need for centralized planning. The Indian economy made rapid strides in the past two decades of economic reforms to become the third largest economy in the world in terms of Purchasing Power Parity (PPP). To move the economy forward, it was imperative to revisit the role played by Planning Commission.

A section of the economists were of the opinion that Planning Commission serves a very limited purpose in the new economic order and expressed their desire for market-responsive administrative machinery. Thus, the newly set up NITI Aayog (National Institution for Transforming India) was established to replace it. Contrary to its previous format, the new organization would involve states in the economic policy-making. As every political state has its unique strengths and constraints, Planning Commission could not meet the expectations of varied states.

NITI Aayog is a group of domain experts empowered by the government to formulate/regulate economic and social policies so as to transform India. It would leverage technology and improvise upon the

transparency to make “maximum governance and minimum government” a reality. The central and state

governments would be immensely benefited because NITI Aayog provides technical and strategic advice.

NITI· Aayog aims to enable India to better face complex challenges, through the following:

Leveraging of India’s demographic dividend and realization of the potential of youth, men and

women, through education, skill development, elimination of gender bias and employment

Elimination of poverty and the chance for every Indian to live a life of dignity and self-respect

Reddressal of inequalities based on gender bias, caste and economic disparities

Integrate villages institutionally into the development process

Policy support to more than 50 million small businesses, which are a major source of employment

creation

Safeguarding of our environmental and ecological assets

Economic System in which the factors of production (such as land and capital) are owned majorly by theprivate sector is a market-driven system. Goods and services are produced/rendered based on consumer needs. In a control and command economy, government plays a major role in deciding the consumption,

production, distribution and exchange of goods and services because of state ownership of productive factors. Goods and services are produced/rendered based on the government‟s perception of societal needs.

A mixed economic system allows participation of public and private sectors to operate for the betterment of the society. However, it is the prerogative of the government to direct the scarce resources through central planning.

Discussion Questions:

What is an Economic System?

(Hints: ownership of land and labor)

2 Do you think NITI Aayog can facilitate inclusive economic development?

(Hints: participation of states in economic planning)

Course Reference: Concept-:Mixed Economy/Unit 1-Introduction to Microeconomics/Subject-Economics for Managers Sources:

“India displaces Japan to become third–largest world economy in terms of PPP: World Bank”, Economic

Times, Apr 30, 2014

“Government establishes NITI Aayog (National Institution for Transforming India) to replace PlanningCommission”, PIB, January 1, 2015
“NITI Aayog: States for greater devolution of funds”, The Hindu, February 8, 2015

Other Keywords: Business Environment

	2		Monetization of Gold

Indians love for gold is acknowledged all over the world. No wonder India became the world‟s largest gold consumer in 2014. According to the World Gold Council, the domestic consumer demand for gold jewellery and investment in India registered 842.70 tonnes overtaking China which is placed at 813.60 tonnes. Although, demand slipped in both nations from record levels of 2013 (the previous year) , it dipped only 14% in India vis-à-vis 38% fall in China. Both countries collectively accoun t for over half of global demand. In 2015, the demand is projected to be in the vicinity of 900-1,000 tonnes in both countries. Bulk of this gold is imported (97%) as the local mining and production is grossly inadequate to meet the local demand in India. While China can afford to import gold considering its burgeoning forex reserves (breached the $4 trillion in January 2015), India can ill-afford import of gold of this magnitude. During 2014, in order to arrest the rising imports, the Indian government increased the import duties to 10% and mandated traders to export 20% in the form of jewellery. Subsequently, they withdrew such restrictions which led to widening of current account deficit (CAD) and drawing down of forex reserves.

Union Budget 2015-16 announced measures to monetize the idle yellow metal. Gold monetization is a process of transforming the nation‟s gold holdings into cash. Under the Gold Deposit Scheme, households

and jewelers who have surplus gold can open metal deposits with Banks and place their gold holdings and earn interest. Banks will lend this gold to those jewelers who are in need of this against interest. Banks earn profits on the interest differential (interest received – interest paid). In times of need, depositors can withdraw gold from their metal account whenever they choose to. Banks and other dealers are also allowed to monetize their gold holdings. Further, Sovereign Gold Bonds are proposed as an alternative financial asset to purchasing the physical metal gold. These bonds carry a fixed rate of interest and at the time of redemption bondholders will receive equivalent cash value of the gold holdings based on the market value prevailing at the time of maturity. Indian Gold Coins with the Ashok Chakra on its face will also be minted to reduce the demand for imported gold coins and enhance the recycling of gold that is available within the country.

Equilibrium in gold prices becomes a reality with gold monetization schemes. Around 22,000 tonnes of gold is lying with Indian households. This gold is neither traded nor monetized as it is always lying idle. Out of this, 23% is in the form of gold bars and coins which can be tapped under the proposed Gold Monetization Scheme. Even if 10-30% of this quantum of gold participates in the scheme, we can bring in around $30-100 billion into the formal financial system. If this scheme is successful, it has the potential to reduce our dependence on imported gold. Investors of gold currently import it and at least we can abort this. According to SBI Research, the scheme can attract Rs 1 trillion and it would increase the spending power of gold

owners while enhancing the lendable resources of the banking system. Another media report states that it has the potential to hike nation‟s GDP growth by 2 %.

Market Equilibrium is a state of the market where the supply is equivalent to its demand. Price isdiscovered when the supply of good or service equates with its demand. At this price point, both buyers and sellers are happy with the price and quantity.

Discussion Questions:

What do we mean by market equilibrium?

(Hints: supply matching demand, sellers and buyers happy)

What is the benefit of Gold Monetization Scheme?

(Hints: slash import bill, conserve forex reserves)

Course Reference: Concept-Market Equilibrium/Unit 2-Theory of Demand & Supply/Subject-Economics for Managers Sources:

“Steps to monetize gold may release $30-100 billion”, www.livemint.com, 1 March, 2015

“India eases gold import rule in surprise move”, www.in.reuters.com, 28 November, 2014
“Gold bonds to tackle yellow fever ”, Deccan Chronicle, 1 March, 2015

Other Keywords: Business Environment

	3		Fermium to boost Consumer Surplus

Consumer surplus in digital products and services had been on the rise. The only price internet users pay for consuming a variety of online services is just for the internet access. Facebook‟s initiative of „internet.org‟

offers free access to internet users for select websites provided they come through a partner telecom operator. This goes a long way in expanding the market as it brings new users into the internet fold by offering web services free initially and priced subsequently (Fremium).

One of the leading partners for Facebook in Africa is Airtel Africa while Reliance Communications partnered with Facebook in India for this initiative. Surprisingly, at a time when the telecom operators are struggling globally because of revenues from SMSes have almost gone, voice rates are dropping and now it is the turn of data access becoming free through this initiative. In the Indian mobile telephony space, telecom tariff has gone up by just 3 paise in the last 3 years. In December 2014, Airtel started charging internet-based calling exactly the same as voice call but withdrew it later because of pressure on the social media.

What is the source of competitiveness?

Internet-based organizations which do not invest significantly in spectrum, network and other operations are offering pseudo-telecom services competing aggressively with the global telecom giants that invest heavily in telecom hardware and telecom software. As companies in the online world vary greatly in terms of their strategic goals and service offerings they may resort loss-leader pricing to generate consumer surplus in the short-run. On account of no provider surplus, this is not sustainable in the long-run. So it is a case of fermium pricing.

Key challenges in measuring consumer surplus

Prof Shane Greenstein at North-western University’s Kellogg School of Management details the problems involved in measuring consumer surplus of a free product. Upfront, we need to know the demand for a product to estimate its consumer surplus. In the case of Facebook and Google Search, they have garnered users (who avail free services) because they have a strong platform. Advertisers around the world follow the crowd. Hence, advertisers are shelling out millions of dollars because these online firms are providing platform. As there is no measurable price, it is impossible to calculate the demand for a platform. Shane Greenstein believes that consumer surplus cannot be too large, because demand is elastic. On an incremental basis, the surplus generated by each new user is probably low. If it amounts to a big number it will be because of the large number of users and not a large surplus per user.

Consumer Surplus is the maximum price that a customer is willing to pay for a product/service over andabove the price he actually pays. It reflects the utility derived by a customer from the purchase of a product/service. The higher the consumer surplus the greater is the expected repeat sales by the supplier/provider.

Discussion Questions:

What is Consumer Surplus?

(Hints: value of the good vs price of the good)

What is Fremium?

(Hints: initially free, subsequently priced)

Course Reference: Concept-Consumer Surplus/Unit 3-Consumer Behavior/Subject-Economics for Managers Sources:

“Want to free Internet? Do philanthropy: Sunil Mittal to Mark Zuckerberg ”, Economic Times, 8 Mar, 2015

“ Measuring consumer surplus online”, The Economist, Mar 11th 2013
“If robots divide us, they will conquer”, Financial Times, 4 February, 2014

Other Keywords: Business Environment

	4		Death of Dumb Phones

If we trace the evolution of mobile telephony, it all started with pagers (the one-way communication devices). Feature phones were an improvisation as they facilitated two-way communication. Entry of smartphones allowed users to have a computer in a phone with a pre-installed browser to access emails, surf net, fax, word process and worksheets. In the early 1990s and 2000s, Nokia was the world leader in the feature phone market in terms of volume, market share and profits. Even in the year 2007, it held 80% of the smartphone market. However, it was losing ground subsequently and died a natural death because of inability to read the changing technologies. It even started competing with Sony, Nikon and Canon as camera sales dwindled because of superior built-in camera. Sony partnered with Ericsson to roll out smartphones competing with Nokia, BlackBerry and Apple.

Customers like to stay connected because of social/professional networking applications like Facebook, LinkedIn, Twitter and Instagram and instant-messaging services like Whatsapp, We Chat and Line. Despite stiff competition from cheap Android producers from India and China, the smartphone market is currently dominated by Samsung and Apple globally because they lead the technological change. They not only anticipate technological changes a shade faster than competition but also drive the change in order to stay ahead of the pack. They invest significantly on R&D (research & development) to create real value and also spend aggressively on A&M (advertising and marketing) to build the perceived value. Global smartphone shipments for 2014 were at 1.167 billion pieces registering a growth of 25.90% over the previous year. Smartphone OS is dominated by Android (76.60%), iOS (19.70%), Windows Phone (2.80%), BlackBerry

(0.40%) and others (0.50%). In a challenging year, Samsung retained its first spot despite a dip in market share to 28% with volumes of around 326.40 million units and Apple‟s market share swelled to 16.40% due

to strong market growth at 191.30 million units.

The market for smartphones became highly competitive as it witnessed two waves of disruptions: Apple was instrumental for the “new market disruption” through innovation and Google through Android platform created “low cost disruption”. Advancement in telecommunication technologies coupled with decrease in the

tariff for cellular services made smartphones affordable to the masses. Customers switched from feature phones (read: dumb phones) to smartphones as it is equipped with touch-screen capability and built-in camera. Advances in mobile technology continue to change how phones function. One of the pioneers in the smart phone space, RIM (rechristened BlackBerry) failed to make the correct adaptations and it was outcompeted by Apple and Samsung. Other players who moved from the traditional handset category such as Nokia, Motorola and Ericsson had been bleeding. Failure of Nokia is because of its weak position in the technological ecosystem – generation, diffusion and utilization of technology. Ownership has changed hands as Google acquired Motorola Mobility; Microsoft controls Nokia; and Sony owns Ericsson completely. Later, Lenovo took over Motorola Mobility from Google.

Technological Change is a change in the set of feasible production possibilities. It is a term that is usedto describe the overall process of invention, innovation and diffusion of processes or technology.

Discussion Questions:

What is the impact of Technological Change? (Hints: more features, competitive cost)
What is driving the sales of smartphones?

(Hints: social networking, instant messaging)

Course Reference: Concept-Technological Change/Unit 4-Production Function/Subject-Economics for Managers Sources:

“Just how bad are things if you‟re not Apple or Samsung?”, www.digitaltrends.com, 3 June, 2013

“Samsung is spending an insane amount of money to beat Apple to the „next big thing‟”, www.bgr.com, 10

March, 2015

“How BlackBerry Fell”, the NewYorker, 12 August, 2013

Other Keywords: Business Environment

	5		Coal Mining in a Hamletian Dilemma

Coal prices in the first decade of the new millennium more than tripled and peaked at $140 in May 2008.

Currently, in March 2015, they are in the dumps at $58 per tonne. There are a variety of reasons for the industry to be in doldrums: India and China, the world‟s biggest importers are shifting towards renewable

because of heavy air pollution caused by coal-fired power stations. USA is burning less coal and exporting more putting downward price pressure. European Union is becoming tough on carbon emissions. Investors are deserting coal business as they perceive it to be bad risk. Australia is the 4^th largest producer of coal in the world after China, US and India. However, it is not a leading consumer making it dependent on international markets. China, Japan, Korea and India account for 80% of fossil fuel imports from Australia. China is slowing down and to top it they have introduced national emissions trading scheme to rebalance the economy away from energy intensive industry. Japan intends to reduce its fuel import bill and is focused on energy efficiency drive. India has doubled clean energy cess on coal to fund renewable energy projects. Weak global prices had made coal mines in Australia reach a shutdown point. These mines are in a hamletian dilemma – to continue or not to continue.

Domestic steel companies in India have been scouting for coking coal mines in USA and Australia. This gives them a strong foothold in a much sought-after coal-producing countries. Gautam Adani is betting $10 billion to exploit the Galilee Basin, Australia that is estimated to hold around 25 billion tonnes. Spread over 2,50,000 square kilometers it is bigger than the United Kingdom. In Mozambique, a consortium of five Indian public sector firms, ICVL (Indian Coal Ventures Limited)acquired a coal mine for a throw away price from Rio Tinto in July 2014. Interestingly, the same consortium had bid for the same coal assets in 2011 but was outbid by Rio Tinto by paying $3 billion. Subsequently, they sold it to ICVL for $50 million absorbing huge losses.

Incidentally, both the Indian players – Adani and ICVL are vertically integrated companies and want to use this coal mined abroad for captive consumption and hence not expecting higher realizations for coal. Adani will mine the coal in the Galilee Basin, move it on his own railway line to a port at Abbot Point owned by him and ship it to his own port in India so as to be consumed in his own power plants. When the mine is fully scaled-up, it would be the largest mine in Australia and also one of the biggest in the world. On the contrary, coal auctions in India received aggressive bids from regulated power sector and unregulated (steel, aluminium and cement) sectors aggregating to over Rs 2 lakh crore. The economic logic behind such big ticket bids in power sector is the possibility of passing on the burden to the end-user through a negotiated Power Purchase Agreement. Unregulated sectors are counting on factors such as low cost of mining, quantum and quality of coal reserves, 30 years of mining rights, and possible hike in import duties on coal. Cartel formation cannot be ruled out in future if coal mining becomes unviable.

Shutdown Point is an output level at which total revenues match total variable costs and the product price is equal to its average variable cost. At breakeven point, the firm‟s total revenues would cover

total expenses (including fixed costs). Hence, there is an incentive to continue when a business is breaking-even but at shutdown point the firm is indifferent either to continue or shutdown.

Discussion Questions:

Distinguish between breakeven point and shutdown point.

(Hints: total revenues & total expenses, total revenues and variable costs)

Identify the causal factors for the slump in the coal industry.

(Hints: tough environmental standards, shift from fossil fuels)

Course Reference: Concept-Shutdown Point/Unit 5-Analysis of Costs/Subject-Economics for Managers Sources:

“Adani’s $10-billion gamble”, Business Today, 18 January, 2015
“ ICVL buys coal mines in Mozambique for a bargain-basement price of $50 million from Rio Tinto”, Economic Times, 31 July, 2014

“Australia‟s coal and gas exports are being left stranded”, www.theconversation.com, 24 November, 2014

Other Keywords: Business Environment

	6		The Nose-diving Indian Aviation Industry

India was one of the first countries to embrace civil aviation. One of the first West Asian airline companies was Air India. The Tata Airline, which began operations in 1932 was acquired by the Government of India in 1945 and rechristened, got the status of Air India International. In early March 2015, this state-run aviation carrier, Air India, had been asked to reply by the Comptroller and Auditor General (CAG) for having sold five Boeing 777s at a huge loss of approximately 500 crores per aircraft to Etihad in 2013. This loss they had accounted for, within a span of 5 years of purchase of aircrafts. Air India had then quoted the reason that those long-range planes were not fuel efficient. Despite having 80% load in its carriers, it had incurred a loss of 1 crore in the US and Japan segments. Spice Jet had been contemplating on selling off, or at the worst, to lease a particular variety of its fleet to contain the costs. The demand for such type of airlines had been lower which had prompted Spice Jet to go in for a reverse move. It was just not demand alone that were quoted by the aviation sector for running losses. The managerial costs had sky-rocketed that many public and private players were on the shutdown point, not mentioning it to be a barrier to new players. The analysts had given the SWOT analysis, some factors indicating the nose-dive of the aviation sector in India.

Strengths:
·	The aviation sector had been one of the fastest growing services sector in India.
·	With trade and services growing immensely, it had contributed to the growth of the GDP.
·	With the entry of the private operators in this sector air travel in India was popularized which

catered to reaching the destination faster.

Weaknesses:·

· High tax structure had hindered its growth.

· High fuel cost coupled with other maintenance and running costs

Lack of skilled resources

Opportunities:·

travel segment

Aviation Industry in India holds around 69% of the total share of the airlines traffic in the region of

South Asia

The urgency of individuals had spurted quick revenue to this industry. The total passenger traffic stood at 153.5 million in 2014.

This industry had faced tremendous competition in domestic carriers segment when compared to

international carriers.

Government regulations had been warning to put a cap on the increased fare charges, the latter

taking advantage of the consumer‟s situation.

Stiff competition through flash fare cuts by the competitors and a swarm of new entrants had given

turbulence to the existing aviation sector.

Deficient airport infrastructure had been a contributor to the dwindling sector.

In a perfectly competitive market, the price of the product is equated to the average revenue earned, which in turn is determined by the demand. Indian aviation industry had been forecasted to be the 3^rd largest aviation market by 2020. Of late, the government had come out with a slew of rapid reforms and expansion plans to

enhance the contribution of this sector. RBI also had initiated FDI reforms in this sector, now it is for us to watch and see whether it would be a fairy tale ending of „all lived happily ever after‟ in this sector through

prompt revival.

Perfect knowledge and perfect information forms the genesis of perfect competition . They contribute to the impersonal nature of this particular market structure consisting of „large number of buyers and sellers with free entry and exit producing homogenous product‟, with no single dominant player.

Discussion Questions:

What could have been the cause of the decline of aviation sector in India?

(Hint: Aviation sector is an example of perfect competition market structure. Large number ofplayers – normal profits increasing costs)

Can government regulations be a savior to this industry?

(Hint: A price cap regulation by the government makes every firm a price-taker. This can help themarginal firms and new entrants to stabilize. However, a regulation on the increasing fuel cost also is necessary. Else, existing firms will be forced to charge high fares and an intense service

competition will exist, a form of oligopoly market characteristic)

Course Reference: Concept-Perfect Competition /Unit 6-Microeconomics/Subject-Economics for Managers Sources:

“CAG asks why Air India sold 5 Boeing 777s at loss to Ethihad in 2013” Mihir Mishra, 16th March, 2015.

“‟DGCA to keep eye on air fares to check „exhorbitant‟, „predatory‟ pricing”, PTI, Business Today, March 14,

2015

“Role of Aviation Industry in India GDP”, businessmapsofindia.com

Other Keywords: Business Environment

	7		Oligopoly Tactics

The 1991 reforms in India had given the taste of technological advancement in various spheres. The telecom industry tapped the enormous potential and became the most competitive. It was second largest in the world for both fixed and mobile phone and third largest for internet user-base. Many players established themselves through various strategies. For instance, Bharti Airtel pioneered in investments; Tata provided the basic facilities; BSNL and MTNL captured the key metros and Idea went in for a new ownership structure. The revenue earned and the untapped market attracted new players. This led to the reduction of profits of the existing firms. They had to concentrate on differentiating their products. Mobile phones came as a wave with differentiated services –extended services like prepaid or post-paid connections, value-added services like sophisticated handsets with teleconferencing facility, camera, internet connection, additional services like the introduction of personalized plans, customer care, free or lower charges for group contacts. To efficiently sell their products, the medium of advertising was employed.

The growing mobile user population literally led to rat race and cut-throat competition. To gain natural leadership in the market and with the help of bureaucrats, some authoritative telephony companies gained an upper hand by being illegally undercharged for frequency allocation licenses to create subscriptions for cell phones. The chosen few got the spectrum at an under-quoted price than the normal auction-price slated by

the government. Some beneficiaries even sold their stakes at a higher price that hyped the firm‟s value

operations manifold times, blatant evidence that caused a loss in billions to the government. This had a dubious impact on incumbent players who could not participate in the bid. This led to the infamous 2G spectrum scam in India in 2001. The Supreme Court took up the case and in its verdict cancelled the licenses of all firms under 2G. With the introduction of 3G in 2008 firms were strictly advised by the

judiciary to abide by TRAI rules. This ensured

· New players to compete in the market

Allocate efficiency – to make the best use of the spectrum and also raise revenue for the

government

Healthy non-collusion among players benefitted the consumers ultimately

Competition among firms to raise their revenues and profits

Enter or exit‟ decision policy for the existing and new firms in terms of investment/ gaininglicense

An Oligopoly market is dominated by a few large suppliers. „Product differentiation‟ through heavy „advertising‟ are the main characteristics of oligopoly. There are „barriers‟ to entry of new firms andcut-throat competition is part of „non–collusive‟ oligopoly. If the product is differentiated under-price

leadership, prices are fixed according to the differences. The Indian telecom industry displayed the features of an oligopolistic industry.

Discussion Questions:

Which reason was contributing to the booming of telecom industry in India? (Hint: Product differentiation.)

What are the features of an oligopoly market structure?

(Hint: Collusion & non-collusion)

Course Reference: Concept-ImPerfect Competition (Oligopoly market structure) /Unit 7-Microeconomics/Subject-Economics for Managers

Sources:

“What is 2G spectrum scam”, India Today online, October 19, 2012.
“Because the price was right”, Sandip Sukhtankar, The Indian Express, online: February18, 2014.
“The competition among mobile network operators in the telecom supply chain”, Livio Cricelli et al.,

International Journal of Production Economics, Vol. 131, No.1, pp.22-29.

Other Keywords: Business Environment

	8		Trade Union and Collective Bargaining

The study of trade unions and collective bargaining were integral parts in understanding the dynamics of labour market. Labour movements were active in raising the wages/salaries and standards of living of the workers in general. Meeting demands through strike were common phenomena of trade unions if initial rounds of talks with the management failed. To quote a few, teachers and other public service workers staged a short-term strike in Germany for higher wages. The U.S. steel workers union and oil companies were on strike demanding a hike in salaries. Construction workers in Dubai held a strike for bonus. Fast food workers, from McDonalds to Pizza Hut, demanded the right to form unions in New York and were on strike for higher wages. The railway labourers in Regina (Nigeria) were striking for improved working conditions. In India, the coal industry protested the privatization move of the government as anti-worker. The workers of Aurobindo Pharma Company at Srikakulam protested for the right to form an union. Thousands of state-owned bank employees were on strike seeking higher pay. The Beedi workers staged a dharna for better amenities and reduced work hours.

Trade unions had an agenda rooted to the common benefits of the workers. Collective bargaining adopted by trade unions had been instrumental in the formation of a registered union in the firm or industry, raising the nominal wages, reducing the work hours, improving the general working conditions, inclusion of contractual workers for benefits, gaining medical benefits, obtaining additional allowances like food subsidies in canteen, regularization of the temporary workers, addition of new members to the union, crèche

facilities for female employees, accident benefits, recognition of leader from outside and the like. The

challenges faced by trade unions were:

· Fragmented labour movements led to lack of fervor in their bargain

· Disinvestment threatened the fixation of minimum wages

· Employing temporary contractual labourers marred the formation of a registered trade union

· Dissolution of the union by the management due to biased nature of the union leader

The trade-off between the employer and employee is like a bilateral monopoly. It would be better to resolve through amicable solutions. The efficiency and genuineness of collective bargaining through trade unions plays a vital role. Income for the workers is a cost to the company or the government ex-chequer. Legal framework of this economic organization (union) working under properly laid statutory regulatory bodies (employer) becomes essential.

Trade unions‟ are organization of workers formed to serve the interests of members in matters relatedto wages and working conditions. Wages represent the price of labour. Wage rate is determined by the demand and supply of labour. Higher the wages lower is the demand for labour. A trade union can influence wages, attract or exert control on the labour supply in the labour market through collective bargaining.

Discussion Questions:

Why is formation of trade union important for workers? (Hint: Wages)

What aspects should a trade union consider before deciding on collective bargaining through strikes? (Hint: Nominal wages)

Course Reference: Concept-Wages and Trade Union /Unit 8-Microeconomics/Subject-Economics forManagers

Sources:

“New Democracy”, CPI(M), February 09, 2015

“Four-year deal includes modest pay raises but addresses union concerns over contracted labor and worker fatigue”, Reuters, Fortune Editors, March 13, 2015.
“Beedi workers stage dharna”, The Hindu, December 11, 2014.

Other Keywords: Business Environment & law

	9		Speculative demand for gold in India

Gold had been a traditional haven in India from time immemorial. India was the world largest consumer of gold with an annual import of around 800-900 tonnes. The jewellery consumption of India and China put together stood at 40% of the global consumption in 2014. Gold was demanded for various reasons. Culture, tradition, religious practices, sentiments, emotional attachment, lucrative investment option, liquid nature during financial crisis was some of the factors that contributed for its demand. Though a non-essential commodity for many, surprisingly the highest consumers of gold were from the rural areas. Various methods adopted by the government and other regulatory bodies to moderate gold import to meet high demands were not successful in shrinking the habit of its accumulation. The main concern of the authorities was to contain the volatility gold caused in the economy. Speculation of gold prices to increase in the future created ripple effects in various spheres.

Speculative demand for gold was influenced by and influenced the general price levels whenever the rupee value strengthened or weakened. When, say, the prices of crude oil shot up it led to speculation of rising prices in gold. India was a large importer of crude oil. Payments for imports were made in US dollars ($). Domestic demand for oil was met by a large import. Large payments for import in terms of US$ weakened our currency which in turn reflected in inflationary situation within the country. As a result gold prices soared in the domestic market. Expecting further increase in the future, demand for gold increased contrary to the theory. When international crude oil prices reduced, our currency strengthened, easing the inflationary situation. However, with the ultimate reduction in gold prices, people thronged the jewellery shops to take advantage of a fall in gold price and raised demand. This played havoc in the Current Account Deficit (CAD) of the budget. Monetarists had to juggle with monetary policy. Gold prices influenced the commodity market as well and the overall financial sector. This troubled the exchange rate. Increased demand not be met by the government, was done so by smugglers. It led to high revenue loss to the government as smuggled gold import evaded tax. This became a vicious circle.

Revenue loss	Widened CAD	Exchange rate
Gold Smuggling	Speculative	Monetary policy
motive for gold


Commodity market	Financial sector	Inflation

Interest rates are inversely related to speculative demand. However, speculative demand for gold in India

was influenced from low real interest rates irrespective of nominal rates being high or low. To reap the fruits of speculative motive behind demand for gold, the government implemented certain measures: ·

· Reduced the import duty and tax on gold

Came out with the monetization of gold through investment options of New Gold Deposit Scheme

and Sovereign Gold Bond Scheme.

Speculative motive is the reason causing people or firms to hold a stock in the belief that a capital gain orthe avoidance of a loss can be achieved by doing so. Speculative demand for money or liquid assets is inversely related to interest rates. By lowering the interest rate, the government can effectively convert the otherwise unproductive store value of gold into productive investment through various schemes offered.

Discussion Questions:

How does gold demand affect the economy? (Hint: speculative demand)

What is the role of monetary policy when speculative demand varies directly with interest rates? (Hint: real interest rate)

Course Reference: Concept-Interest & Profits /Unit 9- Interest & Profits /Subject-Economics for Managers Sources:

“Making thegold deposit scheme work”, The Financial Express, 10th March, 2015.
“Gold to come under significant pressure”, Barclays‟s Kitco News, January 5, 2015

Reserve Bank of India Bulletin, www.rbi.org

Other Keywords: Business Environment

	10		Capital budget of Oil Companies Slashed Worldwide

Formed in 2002 EnCana was Canada‟s well known natural gas producer and one of the world‟s oldest petroleum companies .It produces, transports and markets natural gas, oil and natural gas liquids. The company had been investing huge funds to expand and modernize oil production for many years; however it has different plans for the year 2015.

The company has lowered its budget for exploration and production in 2015.Capital budget of the company has been slashed by a quarter for the year 2015 and it has announced cutting $700 million from its capital budget for the year 2015 .The Calgary-based oil mammoth, will spend between $2 billion and $2.2 billion on its capital budget, an amount which is much lower than earlier forecasts.

The prime reason behind the move is fall in the company‟s profit .The company recorded almost an 85% drop in fourth-quarter operating profit (2014) as a result of decline in the oil prices in the global market

The oil prices over the last few years have been continuously increasing due to an increased demand from emerging economies like India The strong growth of emerging markets had benefited the oil companies immensely and all major oil companies made huge profits and invested huge amounts for expansion activities in past . But with supply increasing world-wide due to higher production levels of oil by OPEC and Saudi, the cost of a barrel slided down. The prices of oil had fallen to $50 per barrel in 2015 from $ 100 per barrel in 2014 impacting the profitability of oil companies and resulting into reduced capital budget of oil producing companies.

All major oil companies have been affected badly by the fall in commodity prices .Oil giants Chevron and Royal Dutch Shell have likewise announced cuts in their capital expenditure plans and are focusing on balancing, maintaining present operations and positioning for price recovery .Capital budgeting decisions involve commitment of large amount of funds for a long period of time and in wake of falling commodity prices the oil producers are playing safe by maintaining a low capital budget

This case illustrates the impact of profits, demand and supply conditions on the capital budgeting decisions. Capital Budgeting is the process by which companies effectively plan and control huge investments or expenditures, the returns on which are generally expected to carry forward to the future

Discussion Questions:

Capital budgeting decisions have to be taken prudently. Discuss (Hint: huge investment and long term impact)

What is the impact of fall in the commodity prices on India?

(Hint: the effects have been positive with decreased inflation)

Course Reference: Concept –Capital Budgeting /Unit 10 –Forecasting and Decision making /subject- Economics forManagers

Source

Encana Corp slashes 2015 capital budget by a quarter after 85% drop in opera ting profit,Reuters,02/15/2015
Chester Dawson, Encana‟s Worries about an Energy Glut Aren‟t over Yet”, Wall Street Journal, 02/09/2015

Encana cuts capital spending plan by US$700M, The Canadian press ,02/25/2015
Our History www.encana.com

Other Keywords: Business Environment

	11		Skill India Scheme to Boost Employment Policy in India

In 2014, after Lok Sabha elections, Narendra Modi-BJP led Government was formed in India. Prime Minister Narendra Modi focused on various macroeconomic policies like fiscal policy and monetary policy, employment policy, international trade policy, exchange rate policy and prices and income policy. He aggressively addressed skill development as a part of an employment policy on 68^th Independence Day on 15^th August 2014.

In 2009, National Skill Development Corporation (NSDC) a public-private partnership enterprise was launched by Finance Ministry. It was formed to achieve objectives of skill development. From 2009-2014, NSDC made low cost and high-quality innovative business models. They launched skill development project

which created industry specific jobs. Later in 2014, NSDC and Government studied and observed

employment-unemployment scenario in India as:

· India‟s labor force was expected to grow to 600 million by 2022

· In 2013, only 13.3% of the youth between 15-29 years were employed

Upto 2014, only 25-30 million of the workforce was formally skilled

of the several initiatives to robust economic conditions in country, Government launched Skill India scheme. Government target to skill 500 million people by 2022 through various skill development programmes. In

addition to support skill India mission, Finance Minister Arun Jaitley proposed a revised skill development policy as “Skill India” in his budget speech in June 2014. As a part, of an initiative Government and

NSDC tried to bridge skill gap and overcome macroeconomic concern through,

Introduced Vocational Training Act partnering with Ministry of Labor and Employment to match

employment of international standards

In 2014, the Ministry of Labor and Employment had signed flexi MOUs with Tata Sons, Flipkart,

Raymonds and the Gujrat Industrial Power Company ltd(GIPCL)

MOUs gave flexibility to enterprises to design training programmes as per specific needs of

industry

Introduced Kaushalya Vardhan Kendras and reshaped Industrial Training Institutes (ITIs) Introduced Make In India and Digital India drive to improve prices and income policy and
international trade policy

Tata Motor‟s partnered with 135 government training institutes across India and trained 10,000

youth for vehicle repair

NSDC partnered with private-public mining corporation and employment exchange programmes in

Gujarat provided training for soft-skills and computer literacy

In similar projects, Ministry of Labor partnered with IT-BPO sector and provided language and

computer literacy skills

Launched Massive Open Online Curriculum (MOOC)

As a part of employment policy, government frequently provided free training facilities to unskilled labor for skilled jobs. In a collaborative approach of NSDC and government generated employment opportunities, growth in economy. This could create sustainable, inclusive and equitable environment in India.

Employment Policy aimed to generate more employment opportunities. A skill India developmentprogramme created job opportunities for all socio-economic classes. The revised skill development policy established the international equivalent employment across all sectors in India.

Discussion Questions:

What do you mean by employment policy?

(Hints: Employment opportunities, training facilities)

Which initiatives were taken by Government under Skill India programme?

(Hints: Training programmes, MOUs)

Course Reference: Concept-Employment Policy/Unit 11-Introduction to Macroeconomics/Subject-Economics forManagers

Sources:

Vishesh Agarwal, “ Skill Building through CSR: The Catalyst for Make in India”, Forbes India Blog, August

08, 2014

Pradeep Mehta, “Should we make in india or in Bharat” , Business Line, December 04, 2014
Yogima Seth, “India‟s Vocational Training Act to provide legal framework for Skill India programme” ,The

Economic Times, August 13, 2014

Other Keywords: Business Environment

GDP at Market Price: Comprehensive Measurement of

12	National Income

In January 2000, National Statistical Commission (NSC) was formed under the chairmanship of Dr. C. Rangarajan. Commission reviewed entire statistical system in country and presented its first report in August 2001. Commission tabulated and monitored national income statistics, enforced standard statistical measurements and effectively coordinated with state governments and union territory. Since, inspection Commission developed national policies, statistical concepts, definitions and methodologies to measure national income.

In 2013-14, IMF‟s (International Monetary Fund) Economic Outlook projected advanced economies were

performing better than emerging economies like India. Emerging economies faced slowdown in infrastructure investments, exports, etc. IMF identified major concern for measuring GDP of India was at factor cost whereas across globe economic markets were measured at market prices. GDP at market prices was the most comprehensive measure of aggregate income. In financial year 2014, to overcome the following issues Central Statistics Office had changed the base year from 2004-05 to 2011-12 for calculating

consumer price. In addition to the base year revision NSC changed calculation of GDP at market price from
GDP at factor cost. As a result, growth of Indian economy was projected as:
·	GDP could be accelerated to 7.4% in the financial year 2015 comparatively to 6.9% in 2014. This
·	could bring Indian economy at par to China(fastest growing economy across globe)
GDP of first three quarters of financial year 2014-15 was recorded at 6.5%, 8.2% and 7.5%
·	respectively and expected around 7.5% for fourth quarter (January-March)
Private consumption could increase marginally to 60.4% of GDP in 2014-15 from 59.7% of GDP in
·	2013-14
GDP growth for 2012-13 was revised from 4.7% to 5.1% as well as 5% to 6.9% for 2013-14
·	Through revised GDP calculation sectors like agriculture, mining and trade, hotels and public
	spending were slow in growth in 2014-15 whereas as key sectors like manufacturing, construction,
·	and financial sectors were gainers
Economists expected nominal growth in GDP at Rs.126.5 trillion for 2014-15 from Rs.113.4
·	trillion in 2013-14
The economy was projected at $2.1 trillion at the dollar exchange rate Rs.61.7
·	IMF had estimated that India could grow at 6.5% which could outpace China‟s growth rate of 6.3%
·	in 2016
India‟s per capita net national income was estimated at Rs.88,538($1,434) which was high of 10.1%
·	as compared to Rs.80.388($1,302) during 2013-14
Government anticipated GDP at 8% and 5.5% inflation for 2015-16

GDP at market prices added taxes and deducted subsidies on products and services from GDP at factor cost. Based on revised GDP performance finance minister predicted growth of 7.5%-8% for financial year 2015-

Therefore, to maintain robust growth in Indian economy, government had to address issues like infrastructure investments, unequal access to quality education, etc.

Gross domestic product (GDP) at market price is the most comprehensive measure of aggregate income. Itwas calculated after deducting net exports from total final expenditure.NSC could measure GDP at market price instead of factor cost. With the revised GDP calculation Government could meet achieve better fiscal and external sectors performance.

Discussion Questions:

How Gross domestic product (GDP) at market price is calculated? (Hint: Comprehensive measure)

What are the benefits of GDP at market price?

(Hint: Subsidies on products and services)

Course Reference: Concept- Gross domestic product (GDP) at market price /Unit 12-National Income/Subject-Project

& Operations Management

Sources:

“New GDP measure puts India‟s economy at &2.1 trillion”, Live Mint, Februray 10,2015
“India to change the way it measures economic growth”, Live Mint, January 29,2015
PTI, “GDP to remain comprehensive measure of economy:Govt”, Business Line, March 4,2015

Other Keywords: Business Environment

	13		MGNREGA Raised Fiscal Deficit

National Rural Employment Guarantee Act, 2005 (NREGA) was launched on 5^th September 2005. An act provided enhancement of livelihood security for rural people in India. It was provided for at least one hundred days of guaranteed wage employment in every financial year to every household whose adult

members volunteered or to unskilled manpower. From February 2006, it was implemented in 200 districts and covered all the districts of India till 1^st April 2008. It was recognized as the Central government‟s largest and most ambitious social security and public work programme. NREGA was awarded as “Stellar example of rural development” in World development report 2014. Later it was renamed as “Mahatma Gandhi

National Rural Employment Guarantee Act” (MGNREGA).

Through the scheme, Rs.120 per day was paid to rural labor. UPA government predicted to create aggregate supply during its flagship spending scheme. In 2010-11, states like Uttar Pradesh, Bihar, West Bengal and

Madhya Pradesh, accounted 59% of the country‟s rural population BPL (below poverty line). Through scheme only 24% of employment was generated. In order to study such implication of MGNREGA economists observed following macroeconomic function as:

Less growth in rural areas affected into steep rural supply curves

Inflation rate had overshot Philips curve(Philips curve represented relationship between inflation and unemployment)

Output/consumption could be increased by raising incomes

Raised fiscal deficit

RBI had concern over increase in inflation

Decreased public finances

Increased in income level proportionally increased in price level

Real income and consumption was not increased

As a step ahead to observe low participation of workforce, economists and policy analysts analyzed macroeconomic phenomenon and failures of MGNREGA as:

Leakages in delivery mechanism due to weak implementation

Improper allocation of scheme resulted into rent-seeking activity (rent-seeking was defined when company, organization or individual used their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation )

Resulted in food and fuel inflation

In 2007-08 only 10.8% of households completed 100 days of employment

Delay in measurement of work due to lack of barefoot professionals and engineers to measure work therefore wages were paid late

Declined in labor participation due to corruption, intimidation from village panchayats

In 2015, Government observed failures of MNERGA and allocated a higher allocation of Rs.34699 crore.BJP-led government committed to support employment through MGNREGA. In order to attain equilibrium in economy economists recommended following measures as follows:

· Introducing employment policies and reforms which could increase income for rural people

· Introducing direct policy for agriculture productivity could increase modern farming techniques · Reframing land holding laws

Aggregate supply curve illustrated the relationship between a country„s overall price level, and the quantityof goods and services produces by the producers. Improper implementation of MGNREGA resulted as only one-third of the price of produced goods reached to producer.

Aggregate supply is the total quantity of all goods and services that business is willing to produce andsupply in a given period at a particular price level. Improper implementation of MGNREGA did not meet the objective of enhancing aggregate supply in India.

Discussion Questions:

What is aggregate supply?

(Hints: Goods and services, overall prices)

How MGNREGA failed to meet objectives aggregate supply? (Hints: Inflation, consumption)

Course Reference: Concept-Aggregate Supply/Unit 13-Consumption and Investment Function/Subject-Economics forManagers

Sources:

PTI, “Budget 2015: MGNREGA gets more funds from Narendra Modi government”, Economic Times,

Februray 28 2015

Gangadhar Patil, “Confress rules states worst performers in MGNREGA implementation”, Economic Times,

Janury 27 2014

Ritwik Priya, “The macroeconomics of NREGA”, Live Mint, October 18,2012

Other Keywords: Business Environment

	14		Budget 2015: Revolutionizing Supply-side Economics

On 28^th February 2015, Finance Minister (FM) Arun Jaitley presented Union budget for 2015-16. Since May 2014, government and economists studied supply side economics. The Supply –side school of economic thought believed that reducing the tax rate and creating an environment which encouraged people to work and save more for economic growth. They observed some issues in supply-side economics as:

Tax structure policy(tax-cuts) was designed for individuals to work more and save more this reform only led to moderate increase in savings of individuals

It was assumed that supply-side economics could increase economic growth during tax cuts but it may lead to budget deficit

Child ULIP‟s (Unit linked investment plans) were expensive and invested into debt instruments

In a move to recover from sluggish economy and to overcome supply-side economics issues FM designed the budget based on micro and macroeconomic policies. He introduced several polices like ebiz portal ( ease of doing business in India), new laws for black money, etc. To boost economic development progrmmmes he sanctioned funds to various schemes like skill India, Digital India, Make in India, Senior Citizen Welfare

fund, Pension Yojana, etc.In addition to the announcements he focused on supply-side economics in an innovative way. FM said in budget speech that „people could save more and spend less‟. FM proposed

initiatives such as:

Introduced tax-free infrastructure bonds to overcome uncertainties in stock market, variation of interest rates in fixed deposits and NBFC‟s (Non-banking financial company) and non-convertible debentures (NCDs)

Removed service tax component around 3-3.5% on premium paid under the LIC‟s Varishta

Bima Pension Yojana to encourage investments

Senior citizens could get higher tax exemption of Rs. 30,000 on health insurance premiums from the earlier slab of Rs.20,000 and disabled senior citizens could avail medical expenditure upto Rs.75,000 from the earlier Rs.50,000

Transport allowances were increased from Rs.800 to Rs.1600 for the salaried class, individual could claim annual deduction of Rs.9600 annually

To encourage retirement corpus, the New Pension Scheme would offer deduction of Rs.1.5 lakh from the previous deduction limit of Rs.1 lakh

Introduced Sukanya Samriddhi Scheme for the girl child. It had a payback like tax benefit on initial investment, tax-free on interest accumulation and maturity payments

All these measures facilitate more money in the hands of taxpaying citizens generating scope for savings and consumption. According to supply-side economics reduction in tax rates would serve as an incentive to people to increase their savings and consumption activates. Government aim to increase savings, investments and economic growth through tax free infrastructure bonds, exemption on interest and maturity earnings on infrastructure, doubling transport allowance and encouraging pension investments.

The Supply-side economics was defined as reducing tax rates which could provide incentives to people

to work more and increase consumption and savings. This could increase in the aggregate supply in the economy. FM‟s initiatives could encourage people to work more leading to increase in national income.

Discussion Questions:

What is supply-side economics? (Hint: supply-side economics)
Which initiatives were taken in budget 2015 to enhance supply-side economics?

(Hint: national income)

Course Reference: Concept-Supply side economics/Unit 14-Classical and Keynesian Economics/Subject-Economics forManagers

Sources:

i. Parvatha Vardhani,C“Budget 2015:Four tax moves to fatten your purse”Februrary 28,2015 , thehindubusinessline.com

Bhavik Nair, “Union Budget 2015: Gilt fund may steal infra bond thunder” , The Financial Express, March

2,2015

PTI, “Budget 2015: The impact on your salary and savings” , Rediff.com, March 2, 2015

Other Keywords: Business Environment

	15		Net Tax Revenue an Edge in Fiscal Policy of Government

On 2^nd January 2013, the Fourteenth Finance Commission (FC-XIV) was constituted by Shri.Pranab Mukherjee, the President of India. It was constituted in terms of Article 280 of the Indian Constitution. It was chaired by Dr. Y. V. Reddy. It was constituted to recommend Union Government to share taxes levied by it to state government. In financial year 2013-14, Union Government directed Finance Commission to give recommendation on pricing of public utilities, GST (goods & service tax) compensation, sale of non-priority PSUs and subsidies, sustainable fiscal environment, debt-stressed states and disaster management act.

As a step ahead, in financial year 2014-15, the commission studied finances, deficit and debt level of state and central government. Finance Commission predicted fiscal deficit for 2015-16 and 2016-17 at 3.6% and 3% of GDP respectively. They expected that macro-economic conditions and growth could enhance the total

tax revenues of the union government upto 2019-20. They examined and found that 60% of central government‟s revenue was allocated for various schemes in state government. This could enhance overall

total tax revenue and eliminate the revenue deficit completely by 2019-20. Finance Commission recommended several initiatives to manage fiscal deficit/surpluses for budget 2015. To balance the union government expenditure they proposed the following major recommendations of revenue deficit grants for state governments for 2015-20 as:

To increase net tax revenue from 32% to 42%. In 2014-15, against total transfer of Rs.3.48 lakh crore approximately the total devolution to the states in 2015-16 could be Rs.5.26 lakh crore approximately

Recommended a grant of Rs.1.94 lakh crore for 11 revenue deficit states like Jammu & Kashmir, Himachal Pradesh, Andhra Pradesh, Nagaland, Assam, Kerala, Manipur, West Bengal Meghalaya, Mizoram and Tripura

In Feb 2015, the Central government had accepted the Commission‟s suggestion on revenue deficit grants. State Governments positively responded to the Central government acceptance. As a result, they planned their extra fiscal allocation for the following causes:

Higher tax devolution could allow states to design economic development schemes for specific non progressive areas

Mobilization of higher allocation of resources resulted in financial autonomy to states

Flexi-funds could be used as per timely requirement

Tax resources could help to achieve state priorities and planned schemes

States could focus over capacity expansion, accountability towards central government and right governance

Extra fiscal grant could reduce disparities of income

Enhanced productive capital assets across all states for employment

Additional grant for 11 special states for economic development and growth

Fiscal policy played a major role in the economic development of country through tax structure, allocation of tax revenue for public expenditure. Prime Minister Narendra Modi and Finance Minister accepted the devolution of money proposed by Finance Commission for economic development of states. This could create cooperative federalism and improve centre-state financial relations.

Fiscal policy is a strategy framed by the government that directs it in planning the expenditure, revenuesand managing the fiscal deficits/surpluses. Central government increased net tax revenue for state governments which could meet the objectives of fiscal policy like mobilization of resources, economic development and growth, reduction of disparities of income and expansion of employment.

Discussion Questions:

What is Fiscal Policy?

(Hints: Expenditure and revenue programs, managing fiscal deficit/surpluses)

Which objectives of fiscal policy could meet by state government?

(Hints: Economic disparities, taxation policy)

Course Reference: Concept-Fiscal Policy/Unit 15-Fiscal Policy and Budget Deficit/Subject-Economics for Managers Sources:

PTI,“Finance Commission tax sharing formula raises fund flow to states”,Live Mint, Februray 25, 2015
Shishir Sinha, “States to get Rs.1.78 lakh crore more from Centre” , Business Line, Februray 24, 2015
PTI, “14^th Finance Commission:J&K to get maximum grant of Rs. 60K crore” , Economic Times Februray 242015

Other Keywords: Business Environment

	16		Open Market Operations

Monetary policy was an important aspect of overall macroeconomic policy. It was laid down by central bank. It involved management of money supply and interest rate.RBI implemented monetary policy through open market operations, bank rate policy, reserve system, credit control etc. As per the economic requirements RBI expand and contract economic policies. In 2014, Urjit Patel Committee was set up by Raghurajan Rajan, RBI governor to strengthen monetary policy framework. It recommended measures over inflation, open market operations, bank rate policy, etc. Later, in 2015 government agreed for new monetary policy framework to achieve price stability and took following measures:

Retail inflation was fixed at 6% by January 2016

Inflation was targeted for 2016-17 whereas all subsequent years were fixed at 4% with a band of plus/minus two percent

Formation of five-member monetary policy committee(MPC)

Government could amend RBI Act to provide transparency and predictability in monetary policy decisions

In 2014, RBI observed issues in existing economy like excess liquidity was anticipated and unable to control total money supply. Later, RBI assessed the liquidity conditions in economy and sold securities under open market operations. RBI examined monetary policy and found excess liquidity in the economic market.

Therefore to strengthen rupee liquidity in economy RBI took following measures as:

From 2^nd to 6^th June 2014 ,RBI sold Rs.2,255 crore of government bonds

On 29^th and 30^th May 2014, RBI sold bonds worth of Rs.4.25 billion

In November 2014, RBI sold Rs.12,000 crore worth of government securities

To meet the primary objective of monetary policy and to strengthen broad money(M3) components like currency with public, demand and time deposits with bank and other deposits with RBI. It stated following features of selling securities in secondary market through open market operations as:

In 2014, rupee rate was increased by 2.81% against the 13% drop in 2013

Securities were sold in combination of long term and short term government bonds

In 2014, RBI sold government negotiable securities on 8.07%, 7.80%, 8.08% and 8.26% interest rate. These securities were holding maturity period like 2017, 2020, 2022 and 2027 respectively

In 2014-15(up to January 23, 2015) Broad Money(M3) was increased upto 8.9% compared to 10.8 percent in 2013-14

Economic conditions could meet demand of base money at the target interest rates

Auction for securities were conducted using multiple price methods like Yield based auction, Price based auction, competitive bidding, non-competitive bidding

New monetary policy by RBI reflected increase in money supply and reduced interest rates. Whereas, decrease in money supply and increase in interest rates accounted contraction in monetary policy. As a part of policy, monetary policy, RBI reserved $5.87 billion in April 2014 and $7.78 billion in March 2014 in currency market. Liquidity was an important factor for growth of economy.

Open market operations refer to the buying or selling of securities by the Central bank. The securities involved were government securities, banker‟s acceptance or foreign exchange. RBI conducted open

market operations to absorb excess rupee from the monetary policy.

Discussion Questions:

What is Monetary Policy? (Hint: liquidity)

Which factors are mentioned in monetary policy?

(Hint: monetary policy)

Course Reference: Concept-Open Market Operations/Unit 16-Monetry Policy/Subject-Project &

Operations Management

Sources:

i. Saikat Das, “RBI conducts open market operations to suck out excess rupee from the system” ,

Economic Times, June 17, 2014

ii. ET Bureau, RBI to sell Rs.12000 crore government bonds via open market operata ions”, Economic

Times, November 27, 2014

iii. SS Tarapore, “A new framework for monetary policy”, Business Line, February 6,2014

Other Keywords: Business Environment

	17		Role of Central bank in controlling Inflation

Raghuram Rajan, took charge as the Governor of Reserve Bank of India in September 2013. The Indian economy was struggling and was not in its best phase .He identified rising inflation as the core issue to be

handled and choose to work in an unconventional way. He took steps which were not appreciated by a section of market. In a speech that he gave soon after taking charge , he said “the governorship of thecentral bank is not meant to win one votes or face book „likes‟,… but to do the right thing, no matter what the criticism.” In spite of an unkind view by a section of market, the results were positive. His steps werevery effective in controlling inflation and he was awarded the “2014 best central bank governor” by Euro

Money.

Major tool used against Inflation

The major tool used to fight inflation was increase in the interest rate. Interest rate was increased three times since September 2013 and the Governor did not reduce the rates in four consecutive policies despite feelers from the India Inc and the Government spokes persons to cut interest rates in order to stimulate growth

Increase in the Repo rate by the central bank increased the cost of borrowing and lending by the banks which in turn discouraged the common man to borrow money. Instead the public was encouraged to save and deposit. This resulted in a decrease in purchasing power and ultimately a reduction in inflation due to decreased demand.

Other Measures

WPI (whole price index ) to be replaced by CPI(consumer price index ) used in developed countries to measure inflation

The base year for calculating consumer prices was changed to 2012 from 2010

Lower weights were assigned to food and fuel while services like education and health were given more significance.

The results

Average Inflation Rate in India from 2012 to 2015	8.87 percent.
All-time high of 11.16 percent in November of 2013	a record low of 4.38 % in November 2014.

The inflation rate stood at a modest 5.5% in January 2015

While the steps taken were effective in bringing down the inflation rate, one of the important economic indicators GDP and IIP (index of Industrial Production) remained to be low during the referred period, may be because of various reasons. One of the reasons attributed for lower inflation was great fall in crude oil prices in the international market.

This case illustrates how the monetary measures by the central bank can help in controlling inflation. The central bank is required to regulate the money supply in the economy in order to control the rate of inflation. This can be in the form of bank rate policy, open market operations or variable reserve ratio

Discussion Questions

What could be the possible reasons to change to CPI from WPI to measure inflation?

(Hint:WPI measures variations in the price levels of commodities that flow through the wholesale trade intermediaries whereas CPI is measured on the basis of change in the retail prices of selected goods and services on which a particular income group spend their money)

What are the measures the central bank takes to curb inflation?

(Hint: The Central bank generally aims to control inflation through regulating money supply through various measures, repo rate changes and adjustment of SLR/CRR)

Course Reference: Concept –Monetary measures /Unit 17 –Inflation /subject- Economics for Managers Source

John Hartley, Rajan “Winning At Fighting India’s Inflation”, Forbes, 1/24/2014
In Joana Taborda, “India Inflation rate 2012–15”, www.tradingeconomics.com, 2/12/2015

Statement by Dr. Raghuram G Rajan, “Governor on Monetary Policy”, Press release ,RBI 1/15/2015

Other Keywords: Business Environment

Global Interest Rates Decreasing to Increase the

18	Money supply

Efforts to boost the money supply were evident in the emerging markets as well as developed economies of the world in the year 2015. Central banks which accounts for nearly 60% of the global economy are slashing interest rates, worldwide. Seven of the world’s 10 biggest economies including India are in easy money mode. More than 12 central banks cut the interest rates in the year 2015.

Central banks of the following major economies have gone for rate cuts in two months (Feb – Mar 2015)

Mar 04	Poland cuts Reference Rate to 1.50 % (- 0.50)
Mar 04	India cuts Policy Repo Rate to 7.50 % (-0.25)
Feb 28	China cuts Lending Rate to 5.35 % (- 0.25)
Feb 24	Turkey cuts Repo Rate to 7.50 % (- 0.25)
Feb 23	Israel cuts Benchmark Rate to 0.10 % (-0.15)
Feb 17	Indonesia cuts Benchmark Rate to 7.50 (-0.25)
Feb 12	Sweden cuts Repo Rate to -0.10 % (- 0.10)
Feb 04	Romania cuts Policy Rate to 2.25 % (- 0.25)
Feb 03	Australia cuts Cash Rate to 2.25 % (0.25)

Adapted from Worldwide Rate Decisions Central Bank Rates w w w. c b r a t e s. c o m

Following the global norm, the central bank of India RBI, which had resisted a rate cut in 2014, surprised the markets by a rate cut twice in a small period of two months. First rate cut was in January 2015 bringing down the repo rate to 7.75% followed by the second rate cut in March 2015 bringing down the repo rate further to 7.5%

Suggested Motives behind Rate cut

Minor return on saving will reduce the incentive to save Reduce the borrowing cost

Encourage the consumers to spend rather than to save Increase in aggregate demand

encourage corporate to take loans

Increase in the business activity

Kick start recovery and growth of the Indian Economy

Other ways in which it helps in economic growth

Reduced interest rates will reduce the cost of monthly loan repayments leaving a common man with more disposable income. Lower interest rates will also make purchasing assets such as a house or car more attractive ultimately increasing not only the amount of money spent but also raising the standard of living ,which is one of the indicators of economic prosperity

Increase in the money supply as a result of rate cut may also have an impact of devaluing the local currency. This in turn will encourage exports and have a positive impact on the current account of the country.

Economic growth requires concerted efforts and effective measures to reduce current account deficit and there is a general consensus that RBI has taken a step in the right direction by a rate cut at the right time

Changes in money supply arises out of actions of central banks .This case illustrates how monetary policies framed by the central banks control the supply of money in the economy with the broad aim of regulating growth and controlling inflation.

Discussion Questions:

What are the different ways in which a rate cut can have a positive impact on economic growth?

(Hint– increasing customer spending and money supply for business activities)

What are the dangers of frequent rate cuts?

(Hint –increasing inflation)

Course Reference: Concept –Money Supply /Unit 18 –Banking and Money Supply /subject- Economics for Managers Source:

12 central banks cut rates this year, CNN Money, 02/05/2015
Worldwide Rate Decisions Central Bank Rates w w w. c b r a t e s. c o m
Manas Chakarbarty ,Reasons for RBI rate cuts ,Live Mint ,03/10/2015

Other Keywords: Business Environment

	19		Stabilizing India‟s BOP

It was as though the economy was under unrelenting rough waters. The unfavourable Balance of Payments (BoP) was a nagging concern to any economy. India being a large importer of oil and gold, any upsurge in the prices of both in the international market caused peril to the BoP; the import bill of gold increased due to an increase in its prices in the international market from $3.9 billion in 2013 to $7.6 billion by 2014 end. Added to it were the contributing factors of mounting debts, increased external borrowings, high volatility

in the Indian rupee, falling Foreign Direct Investments (FDI), high inflation, fall in exports not nullified by fall in imports, inelastic domestic demand for certain key commodities, euro zone crisis in India‟s Balance of

Trade (BoT) to the perilous BOP situation. Each had a role both in capital and current account deficits (CAD).

This alarming issue required immediate attention by the new government. Concerted steps to stabilise the economy led to the gradual improvement in the BoP. It showed a surplus since 2014 and was $6.9 billion for the period July-Sept. 2014. Though the CAD was 2.1 per cent of GDP by 2014 end, officials felt that it was a better figure when compared to record high of 4.8 per cent of GDP by 2013 end. Foreign direct investments (FDIs) improved and flowed from countries like Mauritius ($5.89 billion), Singapore ($4.31 billion), the Netherlands ($2.57 billion), U.S. ($1.48 billion), and Japan ($1.42 billion). It created a healthy atmosphere· and reduced the burden of BoT through

Increased net foreign investment inflows to $12.17 billion by the start of 2015 from 3.01

billion in 2014 end

Net portfolio investment inflow was to the tune of $6.63 billion in early 2015

Crude oil prices and international gold prices softened in improving the BoP

Moderate improvement witnessed in merchandise exports; simultaneous restrictions were

placed on import of non-essential items

Rupee performed better since 2014. This had created a sense of confidence on Indian currency both in foreign exchange and financial markets.

The new government formed at the Centre in July 2014 flagged congenial environment for investment. The need to take the economy on a higher plane through investor friendly trade and investment polices was highlighted by the Central Government. The reforms initiated in the Insurance sector and FDI in defence sector followed by new trade policy framework augmented more capital inflows and put a check to inflation

and expanded exports and increased capital flows through liberalization of external commercial borrowings. “Make in India‟ concept launched to reduce imports and improve brand image, provision for NRI (non-

resident Indians) investment through suitable subsidy / tax policy, and stabilized the currency. These prompt actions gave a face-lift to the BoP position which stabilized from adverse condition.

„Balance of Payments’ and Balance of Trade statistics of a country are indicative of its economic health.In developing countries like India the Balance of Trade is usually adverse, while the Balance of Payments may show a surplus on account of inflows of FDI and remittances from expatriates etc.

Discussion Questions:

What are the items of import that contribute to India‟s Current Account Deficit?

(Hint: import of oil and gold)

Explain the upsurge in inflows of FDI.

(Hint: FII & FDI)

Course Reference: Concept: Balance of Payment/Unit 19: International Trade and Balance of Payments/Subject:

Macro Economics II-Economics for Managers.

Sources:

“FDI, FII inflows rise sharply”, Rahul Agarwal, Economic Outlook, March 10, 2015

www.rbi.org.in

Other Keywords: Business Environment

	20		Understanding Consumer Confidence Index

According to market researcher Nielson, India has topped the worldwide Consumer Confidence Index for the quarter ending Dec 2014 .It is for the third successive quarters, that India led the Consumer confidence Index (CCI) globally ,followed by Indonesia and the Philippines. The CCI in the cities of India was a four year high at 129 in the December quarter, up by three-point over the last quarter, and up by 14-point from Dec 2013.

Consumer confidence index higher than 100 indicate optimism .Growing CCI is good news for the economy because; consumers account for two-thirds of the nation’s economic activity, or the gross domestic product (GDP) on average. In the most unsophisticated terms, when the consumer confidence is high, consumers prefer to spend money rather than to save, indicating a growing economy. Low traveller

High consumer confidence index Higher GDP and Economic growth

With increase in CCI the revised Gross Domestic Product (GDP) in India Increased by 7.50 per cent in the fourth quarter of 2014 over the same quarter in 2013.

Reflections of growing CCI in 2014

A positive Consumer confidence index implies that the consumers perceive the economy to be growing. When consumers have a positive perception of the economy, they tend to spend more which in turn contributes to the growth of the economy

Discussion Question:

What are the implications of a growing CCI for an economy

(Hint: If consumers are doubtful about the economy, they will buy less, leading to decrease in

demand)

Course Reference: Concept –consumer confidence index /Unit 20 –Economic indicators /subject- Economics forManagers

Source

Sapna Agarwal , “India continues to lead global Consumer Confidence Index,” Live Mint , 03/02/2015
“Nielson global consumer confidence report”,” Consumer confidence concerns and spending intentions around the world quarter 2, 2014”.
“India takes top spot in Nielsen’s global consumer confidence”,Business Today ,08/ 18/ 2014

Other Keywords: Business Environment

	21		Indian Economy – Road to Recovery

According to World Banks report “Global Economic Prospects “India is on its way to become the world‟s fastest growing, economy by 2017.India‟s annual growth averaged about 8 percent in the decade up to 2010

and was at an all-time high at 11.40 percent in the first quarter of 2010 but slumped to about 5 percent in the following years. After years of stalled progress and sluggish economic growth economy has picked up and is on the path of recovery.

Economic indicators of Recovery Phase

The inflation rate in India was as low as 5.11 per cent in January 2015. Average Inflation Rate in India was 8.87 per cent from 2012 until March 2015, with an all-time low of 4.38 per cent in November of 2014.

New growth estimates announced in January 2015 show that the Indian economy grew at 7.4 per cent in 2014.

Investment gathered speed and reassured consumers began to spend, demonstrating that worst slowdown may finally be over. Consumer Confidence index in India increased to 129 in the fourth quarter of 2014.

Railway infrastructure was made open to 100% foreign direct investment (FDI) and the overseas funding cap in defence rose to 49% from 26%

Budget 2015 announced a five per cent reduction in corporation tax, which has set the stage to attract private investors and bring them alongside the public investment. 7 billion in roads, railways and irrigation projects further boosted the confidence of private sector investment

India exports 80% of the oil it uses and with the fall in commodity prices in 2014 the economy is likely to accelerate further. International rating agency Standard & Poor’s has revised India’s growth forecast upwards to 7.9% for 2015-16 and 8.2% in 2016-2017and India is all set to recover and enter the expansion phase of its business cycle.

A business cycle is the characteristic up and down fluctuation in the economic activity and has different phases. The Indian economy is in the “recovery phase “which is characterized by increasing employment

opportunities, rise in the income levels and increase in demand for goods and services.

Discussion Questions:

What are the different phases of business cycle?

(Hint: recession, Depression, Recovery and expansion)

What are factors that contributed to recovery of Indian economy? (Hint: policy measures and fall in commodity prices)

Course Reference: Concept –Monetary measures /Unit 21 –Inflation /subject- Economics for Managers Source:

India GDP Annual Growth Rate 1951-2014 ,www.tradingeconomics.com
India economy ‘about to take off’ as Modi’s first budget unveiled ,The Telegraph ,03/03/2015
PTI “Overall, a positive roadmap for growth”, Business Line ,03/02/2015

Other Keywords: Business Environment

	22		Information Technology (IT) Vision for Indian Railways

Since 1964, many countries have developed high speed-high tech rail that include Austria, Belgium, UK, China, France, Germany, Italy, Japan, Poland, Portugal, Russia, South Korea, Spain, Sweden, Taiwan, China and Turkey. High tech modern railways have had a profound influence on the economy of developed countries and the high-tech –high speed rail can have a similar positive impact on economic and social development of a developing country like India .It represents a prime opportunity for nation building.

The railway budget of 2015 took into consideration the need to modernize Indian Railways which is one of the largest railway systems of the world. An investment of Rs.8.5 trillion was proposed for Railways from 2015-19, out of which Rs.5, 000 crore has been committed to IT and research. An entire section of the railway budget 2015 was dedicated to upgrading technology.

Proposals made in the Rail Budget 2015 included the following:

The rail Budget 2015 was a modern railway budget focusing on reforms. Experts opined that the Rail Budget 2015 took the right steps towards modernizing the Indian Rail and set a clear path to make the national transporter the growth engine of modern India.

An improvement in technical knowledge contributes largely to economic development of nation .The case of Indian railways is an example of how countries are making an effort to fuel economic development through technical advancements and innovations.

Discussion Questions:

What are the ways in which high tech Rail can lead to economic growth?

(Hint: It presents opportunities for global and local investments besides creating employment opportunities)

How was rail budget 2015 different from the previous rail budget? What could be the possible reasons for this shift?

(Hint: No fare hikes, no new trains, focus on upgrading technology and modernization of railways)

Course Reference: Concept –Technical Knowledge /Unit 22 –Economic Growth, development and planning /subject-Economics for Managers

Source:

HT Correspondent ,”Rail Budget 2015: No fare hike, no new trains; govt pledges Rs 850,000 crore to modernize railways”, Hindustan Times, 27/02/ 2015

Leslie D Monte , “How technology is helping build a modern, secure Indian Railways”, Live Mint ,13/13/2015

“Rail Budget 2015: Highlights”, Times of India 26/02/2015

Other Keywords: Business Environment

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