ICFAI Economics for Managers - case studies

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Availability of time is a great constraint to these students.
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 Bullet Notes : Helps in introducing the important concepts in each unit
of curriculum, equip the
student during preparation of
examinations and
 Case Studies : Illustrate the concepts through real life experiences

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Case Studies:
Economics for Managers

© The ICFAI Foundation for Higher Education (IFHE),
Hyderabad, May, 2015.All rights reserved
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ii

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
Participants in ICFAI University Programs are eager to apply theory into practice. They realize that
application orientation can enhance their learning and subsequent usage of management precepts and
practices. Picking out the principle behind real world events is critical to this learning.
To fulfill this objective the institution has introduced the Case Study methodology as a learning tool. A
one page case is developed for learning a concept/topic from an illustration of a real world occurrence.
The case illustrates a situation pertinent to an individual/a company/an industry or an economy in relation
to a concept or issue covered in the curriculum. The illustration is specific to the point being discussed.
The case depicts the knowledge which can be applied as illustrated in the practice of the real world.
These experiences can be distilled to look at a core principle at play by the participant. While there could
be multiple principles at play, the illustration of each case helps in its better understanding of the concept
at a very fundamental level.
The learning outcomes expected are:
1. Real world is illustrated and connected back to one concept/topic for better theoretical
understanding.
2. Application based approach, which significantly enhances absorption and retention.
3. Exposure to specific business situations and developments improves perspective.
It may be used for Assessment
iv

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 no t 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 transformIndia. 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 genderbias and employment

 Elimination of poverty andthe chance forevery Indian to live a life of dignity and self-respect
 Reddressalofinequalities basedon genderbias,caste andeconomic 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 the
private 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 andexchangeofgoods and services because of state ownership of productive factors.
Goods and services are produced/renderedbased 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.
DiscussionQuestions:
1 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:
i. “India displaces Japan to become third-largest world economy in terms of PPP: World Bank”, Economic
Times, Apr 30, 2014
ii. “Government establishes NITI Aayog (National Institution for Transforming India) to replace
Planning Commission”, PIB, January 1, 2015
iii. “NITI Aayog: States for greater devolution of funds”, The Hindu, February 8, 2015
OtherKeywords: Business Environment
5

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 forexreserves (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 announcedmeasuresto monetize the idle yellow metal. Gold monetization is a process of
transforming the nation‟s goldholdings 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. Anothermedia 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 is
discovered 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.
1. What do we mean by market equilibrium?
(Hints: supply matching demand, sellers and buyers happy)
2. 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:
i. “Steps to monetize gold may release $30-100 billion”, www.livemint.com, 1 March, 2015
ii. “India eases gold import rule in surprise move”, www.in.reuters.com, 28 November, 2014
iii. “Gold bonds to tackle yellow fever ”, Deccan Chronicle, 1 March, 2015
6

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 and
above 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.
1. What is Consumer Surplus?
(Hints: value of the good vs price of the good)
2. What is Fremium?
(Hints: initially free, subsequently priced)
Course Reference:Concept-Consumer Surplus/Unit 3-Consumer Behavior/Subject-Economics for
Managers Sources:
i. “Want to free Internet? Do philanthropy:Sunil Mittalto Mark Zuckerberg ”, Economic Times, 8 Mar, 2015
ii. “ Measuring consumer surplus online”, The Economist, Mar 11th 2013
iii. “If robots divide us, they will conquer”, Financial Times, 4 February, 2014
7

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,Samsungretainedits first spot despite a dip in market share to
28% with volumes of around326.40 million units andApple‟s market share swelledto 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: App le 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 pion eers 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 used
to describe the overall process of invention, innovation and diffusion of processes ortechnology.
1. What is the impact ofTechnologicalChange?
(Hints: more features,competitive cost)
2. 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:
i. “Just how bad are things if you‟re not Apple or Samsung?”, www.digitaltrends.com, 3 June, 2013
ii. “Samsung is spending an insane amount of money to beat Apple to the „next big thing‟”, www.bgr.com, 10
March, 2015
iii. “How BlackBerry Fell”, the NewYorker, 12 August, 2013
OtherKeywords: BusinessEnvironment
8

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 pertonne.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 4th 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 fromregulated 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 outputlevelat which totalrevenues match totalvariable costs andthe 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.
1. Distinguish between breakeven point and shutdown point.
(Hints: total revenues & total expenses, total revenues and variable costs)
2. 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:
i. “Adani's $10-billion gamble”, Business Today, 18 January, 2015
ii. “ ICVL buys coal mines in Mozambiquefor a bargain-basement price of $50 million from Rio Tinto”, Economic
Times, 31 July, 2014
iii. “Australia‟s coal and gas exports are being left stranded”, www.theconversation.com, 24 November, 2014
9

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 sectorin 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 sectorair 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 othermaintenance 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 passengertraffic 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
 takingadvantage ofthe 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 3rd largest aviation
market by 2020. Of late, the government had come out with a slew of rapid reforms and expansion plans to
enhance thecontributionofthis sector.RBI also had initiated FDIreforms in this sector, now it is for us to watch
and see whether it would be a fairy tale ending of „all livedhappily 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.
1. What could have been the cause of the decline of aviation sector in India?
(Hint: Aviation sectoris an example of perfect competition market structure. Large number of
players - normal profits increasing costs)
10

2. 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 the
marginal 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:
i. “CAG asks why Air India sold 5 Boeing 777s at loss to Ethihad in 2013” MihirMishra, 16th March, 2015.
ii. “‟DGCA to keep eye on air fares to check „exhorbitant‟, „predatory‟ pricing”, PTI, Business Today, March 14,
2015
iii. “Role of Aviation Industry in India GDP”, businessmapsofindia.com
11

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 spectrumat an under-quoted price than the normal auction-price slated by
the government. Some beneficiaries even soldtheir stakes at a higher price that hypedthe 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-collusionamong players benefittedthe consumers ultimately
 Competition among firms to raise their revenues andprofits
„ Enter or exit‟ decision policy for the existing and new firms in terms of investment/ gaining
license
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 and
cut-throat competition is part of „non-collusive‟ oligopoly. If the product is differentiatedunder-price
leadership, prices are fixed according to the differences. The Indian telecom industry displayed the
features of an oligopolistic industry.
1. Which reason was contributing to the booming of telecom industry in
India? (Hint: Product differentiation.)
2. 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:
i. “What is 2G spectrum scam”, India Today online, October 19, 2012.
ii. “Because the price was right”, Sandip Sukhtankar, The Indian Express, online: February18, 2014.
iii. “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.
12

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 contractuallabourers 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 related
to 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.
1. Why is formation of trade union important for
workers? (Hint: Wages)
2. 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 for
Managers
Sources:
i. “New Democracy”, CPI(M), February 09, 2015
ii. “Four-year deal includes modest pay raises but addresses union concerns over contracted labor and worker
fatigue”, Reuters, Fortune Editors, March 13, 2015.
iii. “Beedi workers stage dharna”, The Hindu, December 11, 2014.
Other Keywords: Business Environment & law
13

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 fromthe 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 ripp le
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 or
the 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.
1. How does gold demand affect the
economy? (Hint: speculative demand)
14

2. 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:
i. “Making thegold deposit scheme work”, The Financial Express, 10th March, 2015.
ii. “Gold to come under significantpressure”, Barclays‟s Kitco News, January 5, 2015
iii. Reserve Bank of India Bulletin, www.rbi.org
15

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
1. Capital budgeting decisions have to be taken prudently. Discuss
(Hint: huge investment and long term impact)
2. What is the impact of fall in the commodity prices on India?
(Hint: the effects have been positive with decreased inflation)
Course Reference:Concept –CapitalBudgeting /Unit 10 –Forecasting and Decision making /subject- Economics for
Managers
Source
i. Encana Corp slashes 2015 capital budget by a quarter after 85% drop in operating profit,Reuters,02/15/2015
ii. Chester Dawson, Encana‟s Worries about an Energy Glut Aren‟t over Yet”, Wall Street Journal, 02/09/2015
iii. Encana cuts capital spending plan by US$700M, TheCanadian press ,02/25/2015
iv. Our History www.encana.com
16

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 68th Independence Day on
15th 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 s kill development
policy as “Skill India” in his budget speech in June 2014. As a part, of an initiative Government and
NSDC triedto bridge skill gapand 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 trained10,000
 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 sectorand 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 development
programme created job opportunities for all socio-economic classes. The revised skill development
policy established the international equivalent employment across all sectors in India.
1. What do you mean by employment policy?
(Hints: Employment opportunities,training facilities)
17

2. 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 for
Managers
Sources:
i. Vishesh Agarwal, “ Skill Building through CSR: The Catalyst for Make in India”, Forbes India Blog, August
08, 2014
ii. Pradeep Mehta, “Should wemake in india or in Bharat” , Business Line, December 04, 2014
iii. Yogima Seth, “India‟s Vocational Training Act to provide legal framework for Skill India programme” ,The
Economic Times, August 13, 2014
18

GDP at MarketPrice:Comprehensive Measurementof
12 National Income
In January 2000, National Statistical Commission (NSC) was formed under the chairmanship of Dr. C.
Rangarajan. Commission reviewed entire statistical systemin 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 from2004-05 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 consum ption 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 fromGDP at factor cost.
Based on revised GDP performance finance minister predicted growth of 7.5%-8% for financial year 2015-
16. Therefore, to maintain robust growth in Indian economy, government had to address issues like
infrastructure investments, unequalaccess to quality education,etc.
Gross domestic product (GDP) at market price is the most comprehensive measure of aggregate income.
It was 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.
1. How Gross domestic product (GDP) at market price is
calculated? (Hint: Comprehensive measure)
2. 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:
i. “New GDP measure puts India‟s economy at &2.1 trillion”, Live Mint, Februray 10,2015
ii. “India to change the way itmeasures economic growth”, Live Mint, January 29,2015
iii. PTI, “GDP to remain comprehensive measure of economy:Govt”, Business Line, March 4,2015
19

13 MGNREGA Raised Fiscal Deficit
National Rural Employment Guarantee Act, 2005 (NREGA) was launched on 5th 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 allthe districts ofIndia till 1st April 2008. It was recognizedas the Central government‟s largest and
most ambitious social security and public work programme. NREGA was awarded as “Stellar example of
rural development” in Worlddevelopment report 2014. Later it was renamedas "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:
 Introducingemployment policies and reforms which could increase income forrural people
 Introducing direct policy for agriculture productivity could increase modern farming techniques 
Reframing land holding laws
20

Aggregate supply curve illustrated the relationship between a country„s overall price level, and the
quantity of 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 and
supply in a given period at a particular price level. Improper implementation of MGNREGA did not
meet the objective of enhancing aggregate supply in India.
1. What is aggregate supply?
(Hints: Goods and services,overall prices)
2. How MGNREGA failed to meet objectives aggregate supply?
(Hints: Inflation, consumption)
Course Reference:Concept-Aggregate Supply/Unit 13-Consumption and Investment Function/Subject-Economics for
Managers
Sources:
i. PTI, “Budget 2015: MGNREGA gets more funds from Narendra Modi government”, Economic Times,
Februray 28 2015
ii. Gangadhar Patil, “Confress rules states worst performers in MGNREGA implementation”, Economic Times,
Janury 27 2014
iii. Ritwik Priya, “The macroeconomics of NREGA”, Live Mint, October 18,2012
21

14 Budget 2015:Revolutionizing Supply-side Economics
On 28th 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‟. FMproposed
initiatives suchas:
 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 taxcomponent around3-3.5% onpremium 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 consumptionand savings.This could increase in the aggregate supply in the
economy. FM‟s initiatives could encourage people to work more leading to increase innational income.
22

1. What is supply-side economics?
(Hint: supply-side economics)
2. Which initiatives were taken in budget 2015 to enhance supply-side economics?
(Hint: national income)
Course Reference:Concept-Supply sideeconomics/Unit 14-Classical and Keynesian Economics/Subject-Economics
for Managers
Sources:
i. Parvatha Vardhani,C“Budget 2015:Four tax moves to fatten your purse”Februrary 28,2015 ,
thehindubusinessline.com
ii. Bhavik Nair, “Union Budget 2015: Giltfund may steal infra bond thunder” , The Financial Express, March
2,2015
iii. PTI, “Budget 2015: The impact on your salary and savings” , Rediff.com, March 2, 2015
23

15 Net Tax Revenue an Edge in Fiscal Policy of Government
On 2nd 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 revenuesofthe uniongovernment upto 2019-20. They examined and found that60% ofcentral government‟s
revenue was allocatedfor various schemes in state government. This couldenhance 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 taxstructure, 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, revenues
and 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.
24

1. What is Fiscal Policy?
(Hints: Expenditure and revenue programs, managing fiscal deficit/surpluses)
2. Which objectives of fiscal policy could meet by state government?
(Hints: Economic disparities, taxation policy)
Course Reference:Concept-FiscalPolicy/Unit 15-Fiscal Policy and Budget Deficit/Subject-Economics for Managers
Sources:
i. PTI,“Finance Commission tax sharing formula raises fund flow to states”,Live Mint, Februray 25, 2015
ii. ShishirSinha, “States to get Rs.1.78 lakh crore more from Centre” , Business Line, Februray 24, 2015
iii. PTI, “14th FinanceCommission:J&K to get maximum grant of Rs. 60K crore” , Economic Times Februray
24 2015
25

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 2nd to 6th June 2014 ,RBI sold Rs.2,255 crore of government bonds

 On 29th and 30th 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.
26

1. What is Monetary
Policy? (Hint: liquidity)
2. 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
27

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 workin an unconventionalway.He tooksteps which were not appreciated by a section of
market. In a speechthat he gave soon after taking charge , he said“the governorship ofthe centralbankis not
meant to win one votes orface book „likes‟,… but to do the right thing,no matterwhat the criticism.” In spite of
an unkind view by a section of market, the results were positive. His steps were very 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 fromthe 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
DiscussionQuestions
1. 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)
28

2. 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
i. John Hartley, Rajan “Winning AtFighting India'sInflation”, Forbes, 1/24/2014
ii. In Joana Taborda, “India Inflation rate 2012-15”, www.tradingeconomics.com, 2/12/2015
iii. Statement by Dr. Raghuram G Rajan, “Governor on Monetary Policy”, Press release ,RBI 1/15/2015
29

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 rat e
further to 7.5%
SuggestedMotives behind Rate cut
Minor return on saving will reduce theincentive 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 orcarmore 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 consensusthat 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.
30

1. 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)
2. 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:
i. 12 central banks cut rates this year, CNN Money, 02/05/2015
ii. Worldwide Rate Decisions Central Bank Rates w w w. c b r a t e s. c o m
iii. Manas Chakarbarty ,Reasons for RBI rate cuts ,Live Mint ,03/10/2015
31

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 demandfor 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 internationalgold prices softenedin improving the BoP
Moderate improvement witnessed in merchandise exports; simultaneous restrictions were
 placed on import of non-essentialitems

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 / taxpolicy, 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:
1. What are theitems of import that contribute to India‟s Current Account Deficit?
(Hint: import of oil and gold)
2. 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:
i. “FDI, FII inflowsrise sharply”, Rahul Agarwal, Economic Outlook, March 10, 2015
ii. www.rbi.org.in
32

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 HigherGDP 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
DiscussionQuestion:
1. What are the implications of a growing CCI for an economy
(Hint: If consumers are doubtfulabout the economy, they will buy less, leading to decrease in
demand)
Course Reference:Concept –consumer confidence index /Unit 20 –Economic indicators /subject- Economics for
Managers
Source
i. Sapna Agarwal , “India continues to lead global Consumer Confidence Index,” Live Mint, 03/02/2015
ii. “Nielson global consumer confidence report”,” Consumer confidence concerns and spending
intentionsaround the world quarter 2, 2014”.
iii. “India takes top spot in Nielsen's global consumer confidence”,Business Today ,08/ 18/ 2014
33

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 fluctuationin the economic activity and has different
phases.The Indian economy is inthe “recovery phase “which is characterizedby increasing employment
opportunities,rise in the income levels and increase in demand for goods and services.
1. What are the different phases ofbusiness cycle?
(Hint: recession,Depression, Recovery and expansion)
2. 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:
i. India GDP Annual Growth Rate 1951-2014 ,www.tradingeconomics.com
ii. India economy 'about to take off' as Modi's first budget unveiled ,The Telegraph ,03/03/2015
iii. PTI “Overall, a positive roadmap for growth”, Business Line ,03/02/2015
34

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.
1. 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)
2. 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:
i. 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
ii. Leslie D Monte , “How technology is helping build a modern, secure Indian Railways”, Live Mint ,13/13/2015
iii. “Rail Budget 2015: Highlights”, Times of India 26/02/2015
Other Keywords: Business Environment
35

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