Doubling Farmers Income till 2022

Last Updated: May 2023 (Doubling Farmers Income till 2022)

Doubling Farmers Income till 2022

This article deals with ‘Doubling Farmers Income till 2022.’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


In the 2016 Budget, the Government of India announced to double the farmer’s income (not income from per acre but total what he is earning) until 2022. An annual increase of 15% every year for 6 years was needed.

Government Committees and strategy to achieve this

  • Ashok Dalwai Committee has prepared a report on the way to Double Farmer’s income. 
  • Agriculture Ministry has given Seven-Point Strategy for Doubling Farmers income 
    1. Improvement in crop productivity
    2. Improvement in livestock productivity
    3. Resource use efficiency or savings in the cost of production
    4. Increase in the cropping intensity
    5. Diversification towards high-value crops
    6. Improvement in real prices received by farmers
    7.  Shift from farm to non-farm occupations.  
  • There are some issues as the definition of who constitutes a farmer in India is faulty. The Government considers that person as a farmer who owns the land and possesses a record of right (RoR). But it creates an issue of exclusion and inclusion error.

Ways to double farmer’s income  or increase farmer’s income

1. More from Less

  • Going towards low-input, high-output agriculture, especially Organic farming and Zero Budget Natural Farming.

2. Better Market Price Realization

Farmers should be able to sell their produce at good prices. It can be achieved by

  • Revision of the APMC Act.
  • Promoting Contract Farming.   
  • Focusing on the “demand-driven fork-to-farm approach” (i.e. farmers should produce what consumers demand). Until now, the focus was on ‘farm to fork’ approach.

3. Providing Extension Services

  • Extension services provided to the farmers should be increased. For this, the government should utilize ICT. It can help the farmers make correct decisions regarding inputs and crop-mix decisions.

4. Food Processing

  • There should be more value addition by promoting food processing. The government has already started schemes such as Pradhan Mantri Kisan Sampada Yojana, promoting agro-processing clusters, etc.

5. Insurance and  credit cushion

  • Government should promote Pradhan Mantri Fasal Bima Yojana (PMFBY) to reduce possible risks. 
  • The government should increase the percentage of Institutional Credit to farmers so that they can invest in their farms to increase productivity.

6. Diversification 

Doubling Farmers Income till 2022
  • Emphasis on Livestock sector: Animal husbandry, beekeeping, fishery etc., duly supported by Food Processing Industry should be promoted as a side business to increase farmer’s income.  
  • Farmers should diversify into agroforestry by planting trees on the boundaries of farmers’ fields.

7. Governance

  • States should pass the Model Agricultural Produce and Livestock Marketing Act (APLM) 2017.
  • Government should increase the budgetary allocations to Agricultural Universities, which can do R&D for increasing farmer productivity. 
  • Leasing laws should be reformed so that farmers can lease land easily and do farming on a viable piece of land. 

Agriculture Inputs

Agriculture Inputs

This article deals with ‘Agriculture Inputs.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

1. Land

  • India has 18% of the world population but 2.5% of the world’s land. Hence, the land is a scarce resource in India. 
  • The net sown area in India is 141 million hectares out of India’s total geographical area of 368 million hectares.
  • Due to the tradition of equal division of land among heirs each passing generation, the issue of small-sized farms and land fragmentation has come to the forefront. 
    • The average size of farm holdings has declined from 2.3 hectares in 1970-71 to 1.08 hectares in 2015-16.
    • The distribution of land is not a consolidated one, but its nature is fragmented. Different tracts have different levels of fertility, and it is distributed accordingly. If there are four tracts to be distributed between two sons, both sons will get smaller plots from all four tracts. Hence, landholdings have become fragmented.
  • Small and marginal farmers account for 87 per cent of Indian farmers (source – Agriculture Census 2015-16).
Marginal farmers less than 1 ha 69%
Small farmer  1 – 2 ha 18%
Small Medium 2 – 4 ha 8%
Medium 4 – 10 ha 4%
Large Above 10 ha 1%

Average Land Holding

Side Topic: Types of Holdings

Agricultural holdings are classified into three categories:

Economic Holding Holding which ensures a minimum satisfactory standard of living in a family.
Family Holding Holding which gives work to an average size family having one plough.
Optimum Holding Maximum size of the holding which must be possessed and owned by a family

Problems due to small land holdings

  • Land Consolidation: Reallocation of holdings to create farms comprising only one or a few parcels instead of many patches. However, all states have passed such legislation, but it has been implemented only in Punjab, Haryana and some parts of UP. 
  • Land Leasing: Union has circulated the Model Land Leasing Act providing security to the owner of land against illegal occupation by a tenant farmer. Provisions of the Model Land Leasing Act will encourage owners of land who have moved to some other sector for employment to lease their land to tenant farmers for cultivation. 


  • Land Consolidation: Reallocation of holdings to create farms comprising only one or a few parcels instead of many patches. However, all states have passed such legislation, but it has been implemented only in Punjab, Haryana and some parts of UP. 
  • Land Leasing: Union has circulated the Model Land Leasing Act providing security to the owner of land against illegal occupation by a tenant farmer. Provisions of the Model Land Leasing Act will encourage owners of land who have moved to some other sector for employment to lease their land to tenant farmers for cultivation. 

2. Seeds

  • High Yielding Varieties (HYV) of seeds is one of the most crucial factors for enhancing agricultural productivity. 20-25% of farm productivity rely on seed quality. 
  • But the issue with HYV seeds is that they need to be replaced every year for best results. It is not possible in India because 
    1. Farmers are poor, and they can’t afford to buy HYV seeds.
    2. Due to infrastructural issues, HYV seeds of the best quality aren’t available to meet the demand of all farmers.
  • As a result, India’s Seed Replacement Ratio (SRR) is low, and most farmers use farm-saved seeds.
Seeds quality in India

Side Topic: Seed Replacement Ratio (SRR)

  • SRR is the percentage of sown area covered by the certified seeds rather than the farm-saved seeds. 
  • In India, SRR is low, varying between 20-35% for various seeds.

Side Topic: Type of Quality Seeds

Quality Seeds are of the following types

Breeder Seeds Breeder seeds are produced in laboratories either by ICAR, Agricultural Universities, or MNCs like Monsanto.
These seeds can be High Yielding Variety (HYV) or Genetically Modified (GM) Seed.  
Foundation Seeds Breeder seeds can’t be produced on a large scale. Hence, the industry produces Foundation seeds from Breeder Seeds at a large scale.
In the government sector, National Seeds Corporation produces the Foundation Seeds using Breeder Seeds made by ICAR or Agricultural Universities.  
Certified Seeds

Foundation seeds are then distributed in villages to large farmers and Farmer Producer Organisations. They use foundation seeds to produce certified seeds.

Breeder, Foundation and Certified Seeds are collectively called Quality Seeds.

They are better than Farm Saved Seeds because, according to Mendel’s Laws, dominant genes will dominate in the next generation, and the efficacy of seeds reduces.

Side Topic: Hybrid Seeds and Genetically Modified (GM) Seeds

HYV seeds can either be Hybrid Seeds or Genetically Modified Seeds. The difference between them is as follows:-

Hybrid Seeds Hybrid seeds are developed by cross-breeding or cross-pollination with other plants.
GM Seeds GM Seeds are developed by transferring selected genes from one organism into another.
E.g., In BT Cotton, a gene from bacteria named Bacillus Thuringenesis (BT) is transferred to cotton so that it can produce natural pesticides to kill the insects and pests.

Benefits of HYV  Seeds

  • HYV seeds have a higher yield and productivity than ordinary seeds.
  • HYV has a shorter life cycle, allowing farmers to venture for multiple cropping.
  • Per quintal requirement of irrigation is lower in the case of HYVs.
  • It increases the income of farmers. Per hectare income of farmers increases significantly by using HYV seeds.

Government initiatives wrt Seeds

1 . Sub Mission on Seed

  • It is a scheme under Umbrella Green Revolution Scheme.
  • It aims
    1. To enhance the seed replacement ratio (SRR ).
    2. To upgrade the quality of farm-saved seeds.
    3. To increase the production of certified quality seeds.
    4. Upgradation of public sector seed producing agencies.

2. 100% FDI allowed in Seed Companies

  • 100% FDI is permitted through the automatic route for the development of seeds.

3 . Seed Village Concept

  • A group of farmers in a village are given the training to produce seeds of various crops to fulfil the needs of their village and neighbouring villages.

4. Seed Bank

  • It is the depository of seeds to preserve genetic diversity for future generations.

5. Protection of Plant Varieties and Farmers’ Rights Act, 2001 (PPVFR Act)

  • It protects the intellectual property rights of plant breeders and seed companies
  • Under the Indian Patent Act, seeds and plant varieties can’t be patented. To deal with that issue, the PPVFR Act was introduced, which grants Intellectual Property Rights to the company to charge royalty if others use its method to produce the seed. 
  • This issue came to the limelight in the 2019 PepsiCo Controversy. PepsiCo has developed the FC5 variety of potatoes for the production of Lays. Under the contract, PepsiCo supplied FC5 variety seeds to the farmers. But after the PepsiCo contract expired, farmers continued using the hybrid seeds and sold potatoes to rival companies. 

6. Biofortification

  • Biofortification is used to improve the nutritional quality of food crops.
  • E.g., ICAR developed CR Dhan 310 – a rice variety with higher protein and zinc content than traditional rice and Dhan Shakti – a variety of Bajra that has higher Iron content. 

Issues with the Indian Seed sector

  • India has a low seed replacement ratio and high use of farm-saved seeds, negatively impacting farm productivity. 
  • Low investment in R&D by Seed Companies: Investment in R&D is just 3-4% of profits against the international norm of 10-12 %.
  • India has a weak IPR regime to protect the rights of seed companies. Hence, companies are not interested in investing in India.
  • The efficacy of certified seeds is also doubtful in many cases.  
  • Seed Monopoly IssuesMonsanto and other MNCs indulge in seed monopolization. It has become the cause of farmer suicides in Vidarbha.
  • Issue of Terminator Genes: Seed companies use Terminator genes in the GM seeds. Such seeds can be used only once and lose their vigour next season. In this way, farmers are forced to buy expensive seeds every season. 
  • Issue of Trait Fees: Under the Indian Patent Act, Seed companies can’t patent particular seed and plant varieties. But companies like Monsanto can charge Trait Fees if other companies use their technology to produce the seeds. BT Cotton is produced by Indian Seed Companies using Monsanto’s Bollgard technology, and in return, Indian seed companies pay a type of royalty to Monsanto, called Trait Fees. The government of India decides the ceiling on Trait fees. But the government has no fixed policy in this regard, causing many legal issues.
  • Loss of genetic diversity of seeds as local varieties have not been preserved. 

3. Water and Irrigation

  • Water is a critical input for successful agriculture. This water can be provided naturally through rainfall or artificially through human efforts. 
  • Irrigation is the process of supplying water to the crops by artificial means such as canals, wells, tubewells, tanks, etc., from freshwater sources such as rivers, tanks, ponds, or underground reserves.

India and Irrigation

  • India has 18% of the world population but just 4% of freshwater resources. Hence, fresh water is a scarce resource in India. 
  • 40% of India’s total area under agriculture has irrigation facilities & the rest 60% is rainfed.
percentage of land under irrigation
  • There are regional disparities in irrigation facilities. While Punjab, Tamil Nadu and UP have more than 50% of agricultural land under irrigation, other states like Maharashtra and Rajasthan have less than 50%.
  • Due to lower levels of irrigation, 
    1. Indian agriculture is vulnerable to the vagaries of nature. E.g., due to El-Nino induced drought conditions in 2014, the agriculture growth rate dipped to -0.2%. 
    2. Farmers can’t grow multiple crops reducing the overall productivity of farms and farmers. 

Schemes: Pradhan Mantri Krishi Sinchai Yojana (PMKSY)

  • The Ministry of Agriculture launched it in 2015.
  • It is a core scheme in which the Union give some funds, and the rest of the funds are to be provided by states. 
  • It aims to bring 2.85 million hectares of agricultural land under irrigation.

3 objectives to be achieved under PMKSY

Pradhan Mantri Krishi Sinchai Yojana
Har Khet ko Paani – Increase Irrigated Area so that every farm gets an irrigation facility.
It is to be achieved through Accelerated Irrigation Benefit Program (AIBP).   
Per Drop More Crop Improve the efficiency of water usage by promoting Micro-Irrigation.
E.g., Drip Irrigation, Sprinkler Irrigation etc.  
Watershed Management It includes
1. Setting up Water Harvesting Structures like check dams, tanks etc.
2. Conserve Soil Moisture
3. Ground Water Recharge
4. Municipal Water Treatment and re-use  

Suggestions by Economic Survey to improve irrigation

  • River inter-linking project must be completed to transfer water from water surplus basins to water-deficit basins.
  • Electricity subsidies for tubewells should be eliminated as they encourage wastage of water.
  • Pulse cultivation should be encouraged in drought-prone areas.
  • There should be cost-based water pricing, and canal water theft should be dealt with strictly.
  • Rainwater Harvesting should be encouraged to capture and store rainwater.
  • Watershed Management should be promoted for recharge of surface and groundwater.

4. Fertilizer

Basics of Fertilizers

Plants require Nitrogen, Phosphorus and Potassium (NPK) for their balanced growth. If soil is deficient in these nutrients or if the farmer is using High Yielding Variety seeds that require more nutrients than any natural soil can supply, different fertilizers are used to boost nutrients in the soil.

Nutrient Fertilizer used
Nitrogen (N) Urea
Urea is produced using Haber’s Process using LPG as raw material.
It is the most widely consumed fertilizer in India. The Ministry of Chemical and Fertilizer gives subsidies to the Indian companies to manufacture and sell it at a lower price to farmers. 
Phosphorus (P) Diammonium Phosphate (DAP)
80% of its demand is met via imports.   
Potassium (K) Muriate of Potash (MOP)
It is not manufactured in India. Hence, 100% of its demand is met via imports.

Fertilizer Subsidies

Fertilizers are provided to the farmers at subsidized rates. In 2020, Rs 71,000 crore was paid in fertilizer subsidies by the Union Government.

There are two types of subsidies on fertilizers

1. Nutrient Based Subsidy

  • Nutrient Based Subsidy is used in the case of DAP & MOP
  • The government fixes per kilogram subsidy on DAP & MOP in this system. (Cost of Fertilizer for farmer = Market Price MINUS Fertilizer Subsidy)
  • But, imports of DAP & MOP aren’t controlled.

2. Subsidy on Urea

The case of urea is very different. The government intervenes in the sector in five ways: 

  1. It sets the Maximum Retail Price (MRP).
  2. It provides a subsidy to 30 domestic producers on a cost-plus basis, meaning more inefficient producers get larger subsidies. 
  3. It provides a subsidy to importers.
  4. Imports are canalized—only three agencies can import Urea into India.
  5. Half of the movement of fertilizer is directed—that is, government tells manufacturers where to sell their urea.

These distortions feed upon each other, leading to a series of adverse outcomes.


Subsidized urea suffers from 3 types of leakages : 

  1. Inefficient urea producers.
  2. Subsidized urea is smuggled to non-agricultural uses and abroad to Nepal and Bangladesh.
  3. Larger—presumably richer— farmers consume subsidized urea. Ideally, subsidized urea should be given only to poor farmers.

Problems created by the way Urea is subsidized

1. Diversion

  • Urea is subsidized 75% of its price. 
  • Due to this, it is smuggled to
    1. Industry (Ammonia-based industry) 
    2. Across the border to Bangladesh and Nepal  
  • It is estimated that 41% of Urea is diverted to industry or smuggled abroad.

2. Shortages

  • The regulation under canalization creates shortages. Under the provisions of canalization, the government orders specific companies to when to import, what quantities to import & where to sell. But estimating the demand is a difficult task & shortages can’t be addressed instantaneously (it takes 60 days at least).

3. Inefficient Fertilizer Manufacturers

  • Earlier, the main objective of the Indian government was self-sufficiency  & this led to Subsidy on Cost Plus Basis, where the subsidy a firm receives is based on its cost of production: greater the cost, the larger the subsidy. Consequently, inefficient firms with high production costs survive, and the incentive to lower costs is blunted.

4. Environmental & Health Externalities

  • Since urea is cheaper than other Fertilizers, it creates a situation of urea overuse which is detrimental for the soil. Consequently, the soil’s N:P: K ratio is disturbed (Rajasthan – N:P: K = 25:12:1 instead of 4:2:1). 
  • The declining response ratio or marginal productivity of fertilizers since the 1970s is a pointer to their inefficient use in Indian agriculture.

Steps Already Taken

Indian Fertilizer

1. Direct Benefit Transfer 

  • Earlier, the government used to give subsidies to the fertilizer company when fertilizer left the company’s godowns. 
  • This system has been changed. Now, Fertilizer companies are paid subsidies only after the retailer has sold the fertilizer to the farmer through a Point of Sale (PoS) device.
  • This system prevents the diversion of subsidized urea towards non-agricultural purposes and smuggling to Nepal and Bangladesh.

2. Neem coated urea

  • The government started this scheme in 2015.
  • Under this scheme, urea is coated with neem, which has the following benefits
    1. It stops diversion to industrial consumers as neem coated urea cant be used in Ammonia-based industry due to adverse reactions that neem can cause.
    2. It helps in slowing down the Nitrification of urea & increasing the efficacy of urea.
    3. Due to the pesticidal properties of neem, the amount of pesticides required is reduced.   

3. Soil Health Card

  • Soil Health Card Scheme is a component of NMSA (National Mission on Sustainable Agriculture).
  • In this, farmer’s land is tested for 12 parameters and given Soil Health Card (updated every 3 years).
  • The card also advises the farmer about the type of crops that can be grown and fertilizer requirements to achieve maximum yield for various crops.  


  • Assist farmers in supplying proper fertilizer mix, which is currently dominated by urea. 
  • It will help the farmer to select the most appropriate crop pattern.
  • This will lead to a diverse crop pattern that revolves around wheat & rice.

4. Size of Urea Bag reduced

  • In 2018, the size of the Urea Bag was reduced to 45 kg instead of earlier 50 kg.
  • Reason: Neem Coated Urea has increased the effectiveness of urea. Since farmers mainly assess the requirement of urea in terms of bags, the government has decided to reduce the size of the bag. 

5. Joint Venture

  • To reduce the cost of imported urea, the Indian government is setting up Joint Ventures with companies like Oman, where gas prices are low, resulting in cheaper production of fertilizers. 

Further reforms required

1. Bring Urea under Nutrient Based Subsidy (NBS)

Bringing urea under the NBS program for DAP & MOP would encourage fertilizer manufacturers to be efficient.

2. BAPU Model 

  • Use BAPU (Biometrically Authenticated Physical Uptake) Model for selling urea.
  • Under this model, the government sets the maximum limit on subsidized Urea Bags one can buy. Small farmers will still get all urea at a subsidized rate, but big farmers will have to buy more than the set limit at full price.

3. Leveraging Soil Health Card

  • Use Soil Health Card to make Tailor-made fertilizer for a particular field.

4. Other Steps

Teach farmers about Integrated Nutrient Management which uses practices such as organic manures, plantation of legume crops, crop residue management etc.

Organic alternatives to Fertilizers

Organic alternatives to Fertilizers

1. Organic alternatives to Fertilizers

  • Manure is a natural substance made by the decomposition of organic waste.
  • Apart from nutrients, it also provides humus to the soil.
  • But manure is less rich in nutrients compared to fertilizers.
  • The government is promoting the use of manure via schemes like 
    1. Gobar Dhan Yojana: For converting cattle dung and solid waste from farms and fields to manure, biogas and Bio-CNG (India has 300 million cows generating 3 million tons of dung).
    2. City Compost Scheme: Fertilizer companies and marketing entities will also co-market City Compost with chemical fertilizers.

2 . Vermicompost

  • Vermicompost is a mixture of earthworms and decomposed foodleading to the breakdown of organic matter.
  • Benefits of Vermicompost:
    1. Increase in soil aeration by earthworms.
    2. Enriches soil with microorganisms.
    3. Water retention of soil capacity increases.
    4. Easy to produce at an affordable cost.

3 . Biofertilizer

Biofertilizer uses Micro-Organisms to produce impact similar to Fertilizers. Eg

  1. Rhizobium Bacteria for Nitrogen Fixation.
  2. Mycorrhiza fungi for Phosphorus.

5. Pesticides

Why Pesticides are required?

  • 15-25% of the crop in India is lost to weeds, pests, diseases and rodents.

Statistics of Pesticide Use in India

  • Total pesticide consumption is the highest in Maharashtra, followed by Uttar Pradesh, Punjab and Haryana. 
  • On the other hand, per hectare consumption of pesticides was the highest in Punjab.
  • Amongst the crops, paddy accounts for the maximum share of consumption (26-28%), followed by cotton (18-20%).

Problems in India

Issues of Pesticides in India

Even though per hectare pesticide is much lower in India (0.5 kg per ha) than other advanced economies like 7.0 kg per ha in the USA and 12 kg per ha in Japan. But there are some issues:- 

  1. The quality of the spray is substandard.
  2. Farmers use pesticides without following proper guidelines. 
  3. Use of broad-spectrum pesticides, which kills beneficial insects and pollinators as well.
  4. Residues of pesticides are found in fruits and veggies. It leads to a ban on their exports to first-world nations (especially the EU).
  5. When a pesticide is sprayed on crops, most of it bounces off the leaves, falling on the ground. It then mixes with soil and water, contaminating both, and entering the food chain leading to biomagnification. 
  6. 93 chemicals banned in most of the developed world are sold in India. 
  7. Carcinogenic pesticides like Monsanto’s Glyphosate (brand-named ‘Roundup’) are still sold in India despite the proven fact that it can cause cancer.  
  8. Pesticides like Endosulfan (used on Cashew Plantations in Kerala) have proven genotoxic.
  9. Rising usage: Warmer climate and growing population are expected to increase the use of pesticides to combat the possible rise in pest invasions and feed more people. 
  10. Pesticide poisoning: According to NCRB, in 2019, 6,962 deaths were reported out of 7,007 pesticide poisoning cases.
  11. Opaque and out of date regulatory framework: Pesticide Management Bill (PMB) has been discussed since 2008. The cabinet approved the latest draft in February 2020.
  12. The private sector monopoly: There is a private sector monopoly in pesticide trade whose decision is guided by the profit motive alone. 


  1. Move towards Organic Farming.
  2. Use narrow-spectrum pesticides.
  3. Using biocontrol agents and biopesticides: It is a method of controlling pests such as insects, mites, weeds and plant diseases using other organisms. 
  4. Adopt Integrated Pest Management approach, which encompasses a judicious mix of pest control methods like bio-pesticides, bio-control agents and pesticides. (Vietnam Case Study: In Vietnam, almost all the farmers of Mekong Delta adopted a policy of “no-spray for first 40 days”. They used predatory beetles that prey on rice pests.)
  5. Government should pass the Pesticide Management Bill, 2017, which aims to replace the Insecticide Act of 1968 with larger penalties and jail time for selling substandard or fake pesticides. 

Note: India is a signatory to United Nations Environment Programme (UNEP) led Stockholm Convention for persistent organic pollutants and Rotterdam convention for export-import of pesticides.  

6. Mechanisation

Although India is one of the top countries in agricultural production, farm mechanization is just 40% ( & growing at a very slow pace of 5% per annum),  against more than 90% mechanization in the first world.

Mechanization of Agriculture in India

Why Mechanisation is needed?

  • Companies and governments should invest in R&D for making machinery suitable for different terrains and agro-climatic regions of India.
  • Cooperative farming: The cooperative group can buy mechanical tools instead of individual farmers.
  • Rental Model: Like ZoomCar for Tractors, Reapers etc., can also be used.
  • Custom Hiring Centers (CHCs)
  • Invent cheap machines suited to Indian conditions. E.g., small farmers can use power tiller instead of tractor and power reaper instead of Combines as they are more affordable, have low operational cost and can be used in rugged topography. 

According to the  Dalwai  Committee,  the adoption of agricultural mechanization would reduce the input costs by  25%,  enhance productivity by  20%  and increase the farmers’ incomes by  25-30%.

Problems in mechanisation

  • Soil, Terrain & Agro-Climatic Diversity: Machines used in Punjab can’t be used in North East. There is a need for Tailormade products. 
  • Small farmers with limited income can’t buy Tractors.
  • Low loan support by the banks to the agriculture sector compared to the Industrial sector.
  • Due to Small and fragmented Indian landholdings, it is uneconomical to buy individual machines.
  • Credit procedure: The procedure to avail agriculture term loan for various activities helping farm mechanization is very cumbersome. Also, the interest rate is higher for such loans than crop loans.

Issues with Agriculture Mechanisation

  • Higher Agricultural Mechanisation has led to higher water usage, stubble burning, smoke from machines and soil erosion, thus impacting the environment negatively. 
  • Higher use of agriculture machines leads to displacement of unskilled labour from the rural areas. 
  • The agricultural tools in the market are not gender friendly. 
  • The agricultural tools are costly, and since the farms are small, they are not utilized to their full potential. 
  • Regional Disparities: Northern India has higher mechanisation levels than other regions. (Rice and Wheat crops having the largest extent of mechanization).


  • Companies and governments should invest in R&D for making machinery suitable for different terrains and agro-climatic regions of India.
  • Cooperative farming: The cooperative group can buy mechanical tools instead of individual farmers.
  • Rental Model: Like ZoomCar for Tractors, Reapers etc., can also be used.
  • Custom Hiring Centers (CHCs)
  • Invent cheap machines suited to Indian conditions. E.g., small farmers can use power tiller instead of tractor and power reaper instead of Combines as they are more affordable, have low operational cost and can be used in rugged topography. 


1. Sub-Mission on Agricultural Mechanisation (SMAM)

  • It is a sub-part of Umbrella Green Mission.
  • Aims: promote agricultural Mechanization among small and marginal farmers.

2. State Scheme: Rajasthan Free Rental Scheme for Farm Tools   

  • The government of Rajasthan has started a scheme under which small farmers (having land less than 2.5 acres) can use tractors and sowing machines without paying any rent.

3. “FARMS-app”

  • It was developed by Agriculture Ministry. It connects farmers and Custom Hiring Service Centres so that farmers can rent agricultural machinery.

7. Agro-Credit

Agri credit is an essential input for agriculture to improve productivity. Access to institutional credit enables the farmer to enhance productivity by investing in machinery, purchasing variable inputs like fertilizers, quality seeds, and manure, and providing funds until the farmer receives payment from the sale of produce.


  • The predominance of informal sources44 % of agro finance comes from money lenders. These money lenders are highly exploitative and charge exorbitant rates.
  • Although Short Term Loan quantity has increased, Long Term Investment in agro infrastructure has decreased both by private & public sectors.  
  • Regional Disparity: The coverage is meagre in the north-eastern and eastern regions of the country. 
  • Agri credit /Agricultural loans are not used for the stated purpose. Primarily, they are used for marriage & consumption purposes by the farmer.

Steps taken by the government in giving loans to farmers easily

Agro Credit in India

1 . Priority Sector Lending Norms for Banks

  • Banks are mandated to give 10% of their loans to Agriculture & Allied Sector, and 8% of their loans should be explicitly given to Marginal and Small Farmers.
  • Budget 2021: Farm loan disbursal target was increased to Rs 16.5 lakh crore (10% increase)

2 . Interest Subvention

  • Under this, loans up to ₹ 3Lakh are given to the farmer at an interest rate of 7% & if his credit history is good, then 5% additional subvention is provided by the government, making the effective interest rate of 2% 

3 . Kisan Credit Card (KCC) Scheme

  • KCC is a smart debit cum credit card for farmers. The farmer can later pay credit at a very low rate of interest.
  • The scheme aims to reduce farmers’ dependence on the informal banking sector for credit, which can be very expensive and suck them into a debt spiral.
  • Recent reports suggest high default rates on KCCs, which are becoming a significant source of non-performing assets (NPAs) for banks despite its various benefits.

4 . Negotiable Warehouse Receipt

  • Under this scheme, the farmer can deposit his produce in a warehouse & get a warehouse receipt in return. The farmer can “mortgage” this warehouse receipt to a banker to get loans or trade at Commodity exchange.
  • Hence, these Negotiable Warehouse Receipt helps the farmer get a loan for the next cropping season on receipt & sell his produce at a later date when he receives a favourable price of his product.  

5 . Loan Waivers

  • Various state governments are giving loan waivers to the farmers. 
  • But the efficacy of such loan waivers and their impacts on the government’s finances is highly debated.

6 . NABARD initiatives

  • NABARD has started various initiatives for the farm sector like 
    1. NABARD refinances Agro Loans. 
    2. NABARD operates Rural Infrastructure Development Fund.


  1. Although Short Term Loan quantity has increased, Long Term Investment for building Agriculture infrastructure has decreased.
  2. Loans are not reaching the intended beneficiaries. 
  3. It isn’t easy to monitor the end-use of funds. It is not used for agricultural purposes but for marriage or consumption in most cases.
  4. 44% of agricultural finance is still coming from money lenders and informal sources. 
  5. Banks indulge in coercive actions for repayment, which leads to increased instances of farmer suicides.

8. Insurance

Main problems with previous Farm Insurance Schemes

  1. Low Penetration: Only 22% of agricultural land was covered under crop insurance in 2014.  
  2. Low Sums Insured (SI): The sums insured (SI) were low. It was based on the cost of inputs rather than prospective income. 
  3. High Premium: Huge premium was charged. It was as high as 10% of the sums insured.  
  4. Delayed claims settlement: Claims used to lie unclaimed till six months & beyond.
  5. Low literacy: Farmers don’t know about these schemes and their benefits.
  6. Inadequate Infrastructure: Absence of infra to measure data accurately at farm level.

Pradhan Mantri Fasal Bima Yojana (PMFBY)

PMFBY has been formulated according to the One Nation–One Scheme theme. It replaced the existing two schemes (i.e. NAIS (National Agricultural Insurance Scheme and Modified NAIS) by removing their inherent drawbacks and incorporating the best features of all previous schemes.

Features of PMFBY

Pradhan Mantri Fasal Bima Yojana
  1. Target: To bring at least 50% cropped area under Insurance Cover.
  2. PMFBY removes any artificial capping of the Sums Insured(SI). The SI will be calculated by multiplying the MSP of a crop by the average seven-year yield for the particular village panchayat area where it is grown.
  3. Uniform premium: Farmers will pay a uniform premium of
    • 2 per cent for all Kharif crops
    • 1.5 per cent for all Rabi crops
    • 5 per cent for annual horticultural and commercial crops.
  4. Governments to fully meet the gap between the actuarial premiums and the rates payable by farmers at Union and State levels. 
  5. Use of technology: Government will encourage the use of technology, especially mobiles and remote sensing, for quick estimation and early settlement of losses. 
  6. The scheme is extended to cover post-harvest losses as well.
  7. In 2018, the Centre allowed States to set up their own insurance companies for implementing Pradhan Mantri Fasal Bima Yojana (PMFBY). The move comes after several requests from states.

Working of PMFBY 

  1. Area insured has increased by 38%. It fares well in this regard.
  2. Earlier risk assessment was done at the district level, which was later changed to block level. Now Sum Insured (SI) is measured at Village level, which is closer to reality.

But issues

  1. The critical factor of analyzing the efficacy of an insurance scheme is the ability to settle its claims quickly. PMFBY failed in this aspect as it took several months to pay compensation to the farmers.
  2. There are allegations of profiteering by Insurance Companies.
  3. It is alleged that most of the increase in insured areas is due to mandatory insurance for loanee farmers.  
  4. PMFBY does not cover tenant farmers.
  5. No governance reforms have been initiated. This scheme is also implemented with the help of rusted old machinery consisting of Patwaris and revenue officers.
  6. Lack of farmer awareness: According to the CAG, out of 5,993 farmers surveyed, only 37% were aware of the schemes.
  7. One-size fits all approach: All the farmers in the country have been treated as similar without any option to choose an insurance that meets the specific needs of their region.
  8. No provision for competitive pricing: As per the scheme guidelines, every cluster has a specific insurance company selling insurances, creating infrastructure and manpower for three years. Lack of competition creates a monopoly over the scheme. 

Due to the above issues, various states are replacing PMFBY with their own insurance schemes. E.g., Jharkhand has started its own insurance scheme (in 2021) called Kisan Fasal Rahat Yojana, which will be implemented by Jharkhand’s Department of Agriculture, Animal Husbandry and Co-operative. Gram Sabha has been assigned a major role in accessing crop loss.

Beed Model of PMFBY

The Beed is drought prone district in Maharashtra. The private insurance companies hesitate to do agricultural insurance in the district because many times the insurance claims paid is more than premium collected.

The government has come up with novel solution under which Maharashtra Government has roped in Agriculture Insurance Corporation (AIC) under which the private insurance company will insurance claims upto 110% of premium. On the other hand, if the insurance claims are lesser than 80% of premium, the private insurance company will share part of its profit with AIC.

9. Extension Services

Extension Services are expert services provided to the farmers which can help to improve productivity by providing timely advisory services to farmers to adopt best practices, technology, meet with contingencies, market information etc.

But Problems

  1. In India, there is 1 Extension worker per 800-1000 farmers.
  2. 60% of farmers don’t get any service from Extension workers, according to the NSSO survey.
  3. Farmers depend on the progressive farmer of their area or marketing agent of some company for advice on the product they should use. But the problem is they will suggest only those products which give maximum profits.
  4. There is no lab to farm connectivity.

Steps by the Government

Student Ready

Government is well aware that there is an Extension Worker deficit in India. To bridge the gap, the government has taken various steps.

1. Various Apps started

These include

  • mKisan
  • PUSA Krishi App

2. Kisan TV

  • Government can’t send the person to each village, but each village has TVs. Hence, the Government of India started Kisan TV in 2015.

3. AgriClinics and Agribusiness Centres 

  • Agriculture Graduates set these up to provide paid advice to farmers on various issues. The Agriculture Ministry and NABARD support this scheme.

4. Krishi Vigyan Kendras

  • Krishi Vigyan Kendras are set up by the Indian Council of Agricultural Research (ICAR) and Agricultural Universities for frontline demonstration of agriculture technologies on the field, updating farmers about modern agriculture technologies and providing advisories to farmers using ICT.

5. Helplines

  1. Kisan Call Centre schemes
  2. SMS portal for farmers.

6. Student Ready

  • Under this scheme, the village students are given Agro education.

7. Krishi Unnati Mela

  • Fairs organised by ICAR to demonstrate new agricultural technologies to farmers.

10. R&D in agriculture

R&D in Agriculture is facing problems in India because

1. Lack of funds

  • The private sector doesn’t contribute much investment in agriculture research, and Government funding to R&D is decreasing considerably. This funding needs to be increased. 
  • Allocation for agri-R&D in Budget 2021 was just Rs 8,514 crore. It is even lower than a single private global company like Bayer, whose annual spending on agri-R&D is almost Rs 20,000 crore.

2. Problem with ICAR

The problem with ICAR is that a single body does several roles starting from education to research to extension. Hence, it has become the jack of all trades but master of none.  

3. Problem with Agriculture Universities

The agriculture universities have been plagued & not able to do much because of

  1. Resource crunch
  2. Difficulty in attracting talented faculty
  3. Limited linkages and collaborations with international counterparts
  4. Weakening of the lab-to-land connect
  5. Lack of innovation

4. Low quality research

The R&D sector is suffering from ‘technology fatigue’, i.e. no innovative invention done by the scientific community in the previous two decades.

5. Cereal Centric Research

Indian agriculture research has become too much ‘cereal centric’. Instead, Indian farmers must to focus on pulses, oilseeds, horticulture and animal husbandry.

What can be way ahead

  1. Increase expenditure on R&D in Agriculture by Government sector. 
  2. Kremer’s HIV Vaccine Idea / Government Pull System of Research: Private research in crops grown at a small scale can be boosted by offering the winner proportionately large cash, but the IPR for that innovation is transferred to the government.
  3. Address the regulatory lacunae in GM Crops technology: Pass BRAI Act (Biotechnology Regulatory Authority of India) to remove the issues associated with the present regulatory framework under the aegis of Genetic Engineering Appraisal Committee (GEAC).

Introduction to Indian Agriculture

Last Updated: Feb 2023

Introduction to Indian Agriculture

This article deals with ‘Introduction to Indian Agriculture.’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


  • The word “Agriculture” is a combination of two words, ‘Agri’ means ‘field’ and ‘Culture’ means ‘cultivation’. Hence, Agriculture is the art or science of producing crops and livestock on a farm.
  • India is considered an agricultural economy because 42 % of its population is still dependent on agriculture for livelihood. Recognizing the importance of agriculture in the Indian economy, Mahatma Gandhi considered agriculture as the “Soul of India”. Pandit Jawahar Lal Nehru said, “Everything can wait, but not agriculture.”

Statistics about Indian Agriculture

With the development of the economy, the percentage of people engaged in agriculture is decreasing, and its contribution to the net GDP of India is decreasing as well.

a . Percentage of Indians employed in the Agriculture Sector

  • In 2018, 42% of Indians were employed in the Agriculture sector.
Percentage of Indians employed in Agriculture Sector

b . Contribution of Agriculture to India’s GDP

  • Its contribution to India’s total GDP has decreased from 51% (in 1951) to 17% (in 2018).
  • It means that 42% of the population lives with only 17% of the total income, clearly substantiating the reason why the people who depend on agriculture are poor. 
Introduction to Indian Agriculture

c . Growth rate of the Agriculture Sector

  • The growth rate of Indian Agriculture is highly volatile because Agriculture in India is vulnerable to market forces and the vagaries of climate.
Growth rate of Indian Agriculture Sector

d . Target = Doubling Farmer’s Income till 2022

  • Modi government has announced to ‘Double the income of farmers till 2022 wrt their 2015 income’. But this seems impossible considering the growth rate trends in previous years.

e . Production of Crops

  • The production of crops has seen significant growth. India has become a food surplus country in contrast to a food deficit country in the 1950s.
Production of Crops in India

Agriculture: Prime Moving Force?

  • The Industrial Sector was selected as the PMF of the economy in the late 1940s (i.e. sector which would take the economy forward). But due to market failure, that sector failed to lead the economy.
  • The policymakers understood that the market would not support the industries without increasing the income of people who depend on agriculture for their livelihoodAs a result, in 2002, the Government of India announced agriculture as the PMF. 
  • It has been observed that 1% growth in the agriculture sector leads to 0.5% growth in the industrial sector & a 0.7% increase in national income.

Ministries related to Agriculture

Following ministries are related to Agriculture and Allied activities

1. Ministry of Agriculture and Farmer’s Welfare

  • This Ministry looks after the agriculture sector in India.
  • It has two departments viz. 
    1. Department of Agriculture and Farmers Welfare: It is concerned with all the issues of agriculture and farmers.
    2. Department of Agriculture Research and Education: Mainly concerned with research work through the Indian Council of Agricultural Research (ICAR) and agricultural education through Central Agricultural Universities at Imphal (Manipur), Pusa (Bihar) and Jhansi (UP).

2. Ministry of Fisheries, Animal Husbandry and Dairying

  • The government separated this department from the Ministry of Agriculture and made it a full-fledged ministry.
  • It has two separate departments 
    1. Ministry of Animal Husbandry and Dairying 
    2. Ministry of Fishery 

3. Ministry of Co-Operation

  • A separate ministry named the Ministry of Co-operation was set up in 2021. Earlier, it was under the Ministry of Agriculture. 
  • The rationale of separate Ministry
    1. To cleanse the politicization, corruption and inefficiencies prevailing in the cooperative sector.  
    2. Use cooperative societies to increase farmers’ income in a more efficient way.

4. Jal Shakti Ministry

  • The Ministry of Jal Shakti looks after the irrigation needs of farmers.
  • It has two separate departments
    1. Department of Water Resources, River Development and Ganga Rejuvenation
    2. Department of Drinking Water and Sanitation

MS Swaminathan Commission

Official NameNational Commission of Farmers (2004-06) headed by MS Swaminathan.

Main Recommendations

1. Farmer’s Income

  • MSP should be at least 50% more than the weighted average cost of production. (Most Important)
  • The “net take-home income” of farmers should be comparable to civil servants. 

2. Land Reforms

  • Distribute ceiling surplus and wastelands to the landless farmers. 

3. Irrigation Reforms

  • There should be more emphasis on rainwater harvesting.
  • Aquifer recharge should become mandatory. 

4. Credit and Insurance

  • Establish an Agriculture Risk Fund to provide relief in natural calamities.  
  • Issue Kisan Credit Card.
  • Develop an integrated Crop-Livestock-Human health insurance package for farmers. 

5. Governance

Set up State level Farmers’ Commission with the representation of farmers for seeking dynamic government response wrt farmers’ problems. 

Important Schemes

From Core Schemes, those related to agriculture are

1. Rashtriya Krishi Vikas Yojana (RKVY) – Raftaar

  • Rashtriya Krishi Vikas Yojana was started in the UPA regime to achieve 4% annual growth in the agriculture sector.
  • In 2017, the Modi government renamed and rebranded it to RKVY-RAFTAAR.
  • It provides 
    1. Funding for Infrastructure development (warehouse, cold storage, market facility etc.)
    2. Training & skill development (for beekeeping, floriculture, mushroom cultivation etc.)
    3. Financial support to farmers to start Agri-enterprise after getting the training. 
    4. Fund Agri start-ups.

2. Green Revolution – Krishi Unnati Yojana

  • It is an Umbrella Scheme consisting of 11 schemes or missions.
  • The Ministry of Agriculture runs it.
  • Schemes under this are

2.1 Mission for Integrated Development of Horticulture (MIDH)

  • The scheme to promote horticulture covering fruits, vegetables, root and tuber crops, spices, flowers, plantation crops etc., was introduced in 2014-15.
  • Under it, there are 6 sub-schemes
1 National Horticulture Mission (NHM)
2 Horticulture Mission for North East & Himalayan States (HMNEH)
3 National Bamboo Mission (NBM)
4 National Horticulture Board (NHB)
5 Coconut Development Board (CDB)
6 Central Institute for Horticulture (CIH)

This programme is designed to leverage the geographical specialization of horticulture clusters and the development of pre-harvest, harvest and post-harvest activities. 

2.2 National Food Security Mission (NFSM)

  • NFSM aims to increase the production of wheat, rice, pulses, commercial crops, coarse cereals and vegetable oils.

2.3 National Mission for Sustainable Agriculture (NMSA)

  • To encourage organic manures, bio-fertilizers, and cropping practices for soil and moisture conservation measures. 
  • Soil Health Card and Paramparagat Krishi Vikas Yojana have been started under this scheme.

2.4 Submission on Agriculture Extension (SMAE)

  • To provide extension services to farmers like Kisan Helplines, Kisan TV, information about market price, weather forecast etc.

2.5 Sub-Mission on Seeds and Planting Material (SMSP)

  • To promote new technologies in seed production, processing, storage, certification etc.

2.6 Sub-Mission on Agricultural Mechanisation (SMAM)

  • To increase farm mechanization to increase the productivity of Indian farmers.

2.7 Sub Mission on Plant Protection and Plan Quarantine (SMPPQ)

  • To minimize crop damage by insects, pests, nematodes, weeds, rodents, etc. and to protect agricultural biosecurity from alien species like Lantana (Congress Grass).

2.8 Integrated Scheme on Agriculture Census, Economics and Statistics

  • For agriculture data collection, which can be used for R&D and policymaking.

2.9 Integrated Scheme on Agricultural Cooperation (ISAC)

  • To provide financial assistance to farmer cooperatives for agricultural marketing, processing, storage etc.

2.10 Integrated Scheme on Agricultural Marketing (ISAM) 

  • To do marketing of Indian agriculture.

2.11 National e-Governance Plan – Agriculture (NeGP- A)

  • To enhance the reach of extension services- about cropping methods, market prices etc., to the farmers.

3. Agriculture Infrastructure Fund (AIF)

  • It is a central sector scheme operational from 2020-21 to 2029-30. 
  • Aim: Provide medium- and long-term debt financing to create post-harvest management infrastructure and farming assets.
  • Under the scheme
    1. Rs 1 lakh crore is planned to be given to banks and financial institutions, which will provide loans to farmers, cooperative societies, Farmer Producer Organizations etc., for the creation of assets.
    2. Interest subvention of 3% is provided if the loan is lesser than Rs 2 crore.
    3. The government provides a credit Guarantee if the loan is lesser than Rs 2 crores.

4. PM Kisan Sampada Yojana

  • SAMPADA = Scheme for Agro-Marine Processing and Development of Agro-Processing Clusters 
  • It is an umbrella scheme formed by incorporating all the schemes of the Ministry of Food Processing. These schemes include 
    1. Mega Food Parks
    2. Integrated Cold Chain Infrastructure Scheme
    3. Food Safety Infrastructure Scheme
    4. Infrastructure for Agro-processing Clusters
    5. Creation of Backward and Forward Linkages
    6. Creation of Food Processing & Preservation Capacities. 
    7. Operation Green for Tomato, Onion and Potato (for combating inflation in these vegetables)
  • Objectives of the Sampada Scheme
    1. To create jobs in the food processing industry
    2. Reduce food wastage 
    3. Boost Mega Food Parks and Cold Chain Infrastructure

5. Pradhan Mantri Krishi Sinchai Yojana

  • Dealt in Chapter

Strengths & potential of Indian agriculture

  • 17% share in GDP of Agriculture & allied activities.
  • 42% population depends on agriculture & allied activities for employment.
  • First rank in milk production, accounting for 17% of world production.
  • India is the largest producer of fruits like banana, coconut, cashew, papaya, pea, cassava, pomegranate etc.
  • India is the largest producer & exporter of spices. 
  • India is the second-largest producer of vegetables, fruits & fish.
  • Weather permits multiple crops throughout the year.  

Characteristics of Indian Agriculture

  1. Indian agriculture is mainly of the Subsistence type. 
  2. Intensive farming is carried out in a limited area. 
  3. Less-mechanized: The level of mechanization is deficient.
  4. Low-per-person productivity. 
  5. Division of land throughout generations has led to land fragmentation. 
  6. Poor forward & backward linkages. 
  7. The underdeveloped food processing industry leads to low-value addition.
  8. Poor agro-infrastructure like cold storage, refrigerated vans etc.
  9. Indian agriculture is more focused on food grains (cereal crops). 
  10. Diversity of crops: The variety of inter-crop and intra-crop is large. 
  11. India has the highest percentage of the geographical area under cultivation globally.
  12. Mixed agriculture is practised in India, where farmers practice agriculture and livestock /fishery/ poultry.
  13. Indian agriculture is heavily dependent on rainfall for irrigation.
  14. Climate and edaphic factors in India are favourable for agriculture.
  15. Minimum attention is paid to fodder crops.

Problems of the Indian Agriculture Sector

Since independence, Indian agriculture has advanced significantly, with chronic food shortage giving way to food self-sufficiency despite a 1.5-fold rise in population. In 1966-67, before India’s Green and White Revolutions, Indian wheat and milk production was just around one-third of American output. Presently, Indian wheat output is 60 per cent higher than America’s, while Indian milk output is 50 per cent higher. However, these tremendous increases in aggregate production do mask some disquieting trends.

1. Excessively Cereal Centric

  • Although India has become self-sufficient in food production, at the same time has become excessively cereal-centric and input-intensive as the present cropping pattern consumes a large amount of land, water, and fertilizer. 

2. Reducing Per Capita land

  • In India, 87% of farmers are Small and Marginal (i.e. owning less than 2 ha land).

3. Marketing Problems 

There are a large number of marketing problems wrt Indian agriculture like

  1. APMC Act issues
  2. Lack of Warehouses
  3. The Food Processing Industry is not developed.
  4. Significant price fluctuations, especially sharp fall in prices.

4. Monoculture

  • Monoculture uses the land to cultivate one crop type, usually for multiple years in a row. E.g., Punjab’s 83% land is devoted to rice and wheat alone.
  • Impact 
    1. It decreases land productivity.
    2. It leads to an inadequate response to fertilizers. 
    3. It decreases the health of the soil.
    4. Crops become more susceptible to pest attacks. 
    5. It impacts nutritional security.

5. Water Challenge

  • India grows water-intensive crops like sugar, which uses 2000 lt, and rice which uses 5000 lt of water to produce a kilogram.
  • Despite being one of India’s most scarce natural resources, India uses 2 to 4 times more water than China or Brazil to produce a unit of a food crop.
  • 70% of fresh water in India is used for Agriculture, which is the highest globally. 
  • India uses a “flood” irrigation method using the canal and well irrigation facilities, which is highly inefficient.
  • Subsidies on power for agricultural use incentivize wasteful use of water.
  • According to an analysis by NASA, India’s water tables are dropping by 0.3 metres annually.

6. Climate change

The increased frequency of extreme weather events adversely affects agricultural production through soil erosion, pest attack, crop failure etc. 

7. Low Productivity

  • India’s per-hectare yield is very low in all crops. 
  • Except for Punjab & Haryana, all other states fare poorly wrt China. Analysis of per hectare yield of rice corroborates this fact.
China 6700 kg/ha
Punjab 6000 kg/ha
India 2400 kg/ha

8. Second Generation problem of the Green Revolution

  • Misuse and abuse of the technologies responsible for the Green Revolution, like fertilizer, groundwater, etc., have negatively impacted natural resources (soil, water, biodiversity) and, consequently, challenged the long-term sustainability of agriculture. 

9. Faulty Government policies 

  • Due to vote bank politics, the government keeps increasing the Minimum Support Price of wheat, rice and sugarcane. On the other hand, MSP is not announced for vegetables and fruits, especially tomatoes, onions etc.
  • Fertilizer subsidy, especially on Urea, leads to wrong usage practices & harms the fertility of the soil in the long run, apart from increasing the government’s fiscal deficit. 

10. Minimum Export Price (MEP) issue

  • Whenever International prices are higher than Indian prices, the Government sets the Minimum Export Price high so that farmers cannot export their products and benefit from higher international prices. It is mainly done to protect Indian consumers from inflation. 
  • E.g., if the Onion price in India is ₹50/kg and that in the international market is ₹100/kg, the Government will set MEP at ₹125/kg.  

11. ECA (Essential Commodities Act)

  • Whenever the price of any agricultural product (like an onion) increases, the government use provisions of this act to harass those farmers who have stored their product in warehouses for better price realization.

12. Inflation Targeting Policy

  • The new Inflation Targeting Policy uses CPI to set monetary policy (which has a 46% food component). Hence, inflation increases when the price of food crops increases, and RBI takes steps to decrease agro-product prices.

Due to MEP, ECA & Inflation Targeting, we can say that Government policies have pro-consumer rather than pro-producer bias as far as agro products are concerned.

Famous Scams

Last Updated: May 2023 (Famous Scams)

Famous Scams

This article deals with ‘Famous Scams.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

1. Roopal Panchal IPO Scam (2003-05)

  • Period of Scam: 2003 to 2005
  • Roopa Panchal forged documents to create multiple DEMAT Accounts (she opened more than 55,000 Demat Accounts).
  • At that time, PAN Card wasn’t mandatory for IPO Applications up to ₹50,000.
  • Since she was bidding from multiple accounts, there was more chance of allotment of shares in IPO sale. 
  • After that, she sold those shares in the Secondary Market at a high rate and earned a lot of money. 
  • She was busted and jailed. 

To stop such scams, PAN Card was made compulsory for all bidding.

Roopal Panchal IPO Scam

2. Harshad Mehta & Ketan Parekh Scam

  • Both used the same idea => Gathered a large amount of money from banks and started to buy a share of the particular company, raising its price. The common public thought to invest their money in shares of these companies since their price is rising. But after raising the price, they sold all those shares at a high price and earned huge profits. 
Harshad Mehta & Ketan Parekh Scam

Why are these types of scams are bad?

  • If we don’t stop them, small investors will lose faith. It will hurt the deepening of the Capital Market in India.

How to contain such Scams?  – Circuit Breaker

  • SEBI introduced Circuit breakers to stop these types of scams. 
  • In this, trading of a particular share showing high volatility is stopped by Stock Market for a particular time
Famous Scams

3. Chit Fund Scams

Two major Chit Fund Scams have happened in the recent past.

  • Rose Valley Scam (West Bengal) – Gautam Kundu (scam worth ₹40-60 Thousand Crore)  
  • Saradha Chit Fund Scam (WB) – Sudipto Sen

What is Chit Fund?

  • Chit Funds are a rotating savings and credit association system practised in India.
  • In Chit Fund, all the members who have subscribed to a particular Chit Fund Scheme contribute equally every month for a pre-determined period. The person who gives the lowest bid takes money for that month, distributing the remainder equally between all members.  
  • Agent (Foreman), the organiser of a particular Chit Fund Scheme, gets his Fixed Commission. 
  • The person who has already taken the bid continues to pay his subscription fee for the remaining months.
  • They are also known as ‘Kuri’ or ‘Fraternity Fund’ or ‘Committee’ (in Punjab) or ‘Rotating Savings and Credit Institution (ROSCA)’.

Chit Fund

Laws to regulate Chit Funds

  • Supreme Court Judgement says that Chit Fund is a type of Contract. Since Contracts are in Concurrent List, both State and Centre can make law on it. Accordingly, Union and State Governments have made laws to regulate them.
    • Union: Chit Funds Act, 1982 (Chit Fund Managers have to register with Ministry of Corporate Affairs)
    • States: Some states like Andhra, Kerala, Tamil Nadu, West Bengal etc., had made their laws. (Chit Fund Managers have to register with State Government)
  • Hence, Chit Fund Manager can either register with the State government or Central Ministry and run Chit Fund Schemes legally.

How do frauds happen?

  • Farmer can store his produce in Warehouse and get Negotiable Warehouse Receipt(NWR)
  • After that, the farmer can sell these Warehouse Receipts to traders in Commodity Exchange. The trader can get delivery from the Warehouse using a receipt after a certain number of days (T + days SYSTEM).

Recent steps to control Chit Funds

  • SEBI REGULATION 2014: Amendment in SEBI act was done by the Parliament, which states that if pooled money in any scheme is more than ₹100 crore, it will be categorized as Collective Investment Scheme and comes under SEBI Regulation.
  • Banning of Unregulated Deposit Schemes Bill, 2018: Bill prohibits Deposit Takers from promoting, operating, issuing advertisements or accepting deposits in any Unregulated Deposit Scheme. Strict penalties and jail terms have been provided in the bill. 

What needs to be done

  • Improve financial literacy of the investors. 
  • Resolve multiple regulation problems. Implement FSLRC (Financial Sector Legislative Reforms Commission/ Justice BN Srikrishna Committee Report) to make Unified Financial Agency (UFA).
  • Powers to impose a heavy penalty on the non-registration of such schemes should be given to the regulator. 

4. NSEL Scam

How trading happens in Commodity Exchanges

  • Farmer can store his produce in Warehouse and get Negotiable Warehouse Receipt(NWR)
  • After that, the farmer can sell these Warehouse Receipts to traders in Commodity Exchange. The trader can get delivery from the Warehouse using the Receipt after a certain number of days (T + ‘x’ days SYSTEM).


  • NSEL is the name of the Commodity Market Exchange promoted by Jignesh Shah. 
  • Commodity Exchanges earn Money by taking a certain percentage of the price of the commodity they sell as their share.
  • In the scam, Jignesh Shah used to generate fake warehouse receipts and sell those receipts to traders. In the meantime, he used to gather real receipts from farmers as actual settlement takes place after some time (under the T+ ‘x’ days System). But he couldn’t sustain this system for long, and the whole scheme busted. 
  • The whole scam was of tune of ₹5600 Crore. 

When this scam happened, Commodity Market Exchanges were under the regulation of the Forward Market Commission (under Agriculture Ministry). But after that, SEBI took over the regulation of Commodity Market Exchanges.

Steps taken by Government to stop such Scams

  • Empowered SEBI: New provisions of the amended SEBI Act, 2014 
    • Made it mandatory for money pooling schemes collecting over Rs.100 crore to register with SEBI. 
    • Enhanced the powers of SEBI, giving the authority to conduct searches, confiscate assets such as property and bank accounts and detain suspected violators, making it one of the most powerful regulators in the world. 
  • Budget 2021 announced that The government intends to formulate a new Security Market Code by merging SEBI Act, Depositors Act, Securities Contracts (Regulation) Act and Government Securities Act. 
  • Budget 2021 also announced that the government intends to make Investor’s Charter to address investors’ issues and create a proper redressal mechanism. Charter will also include the rights and responsibilities of investors.
  • Depositor Protection Acts by States: State Depositor Protection Acts empowered district magistrates to take action against any entity collecting unauthorised deposits. Twenty states and Union Territories have already enacted Depositor Protection Act. 
  • Creation of alternate schemes & Financial Inclusion: Merely curbing the Ponzi schemes won’t solve the problem. Thus, while SEBI is doing the job of the market watch, RBI is directing the banks to ensure financial inclusion.  

Investment Funds

Last Updated: May 2023 (Investment Funds)

Investment Funds

This article deals with ‘Investment Funds.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here .


  • It is quite difficult for ordinary people to understand economic concepts and invest in bonds and equity after analyzing the market. There is an easy option for such people to invest in Investment Funds that gather money from ordinary people to invest in such securities and other projects and are managed by Fund Managers with expertise in financial matters. 
  • Fund Managers take money from investors and give them units made with the backing of investments.
  • Later, Manager gets a return from the investments in the form of interest, dividend, charges etc. and distribute this return among Investors based on the share they have in Fund after cutting his fee.

1. Mutual Funds

Mutual Fund
  • Mutual Fund Manager is a financial intermediary.  
  • Mutual Fund Manager mops up money from a group of investors to invest in different asset classes like shares, bonds etc., to generate returns for investors. In return, the Manager gives Units backed by the assets to the Investors.  
  • When a Mutual Fund manager gets returns in the form of dividends and interest from the assets in which investors’ money was invested, it is distributed among investors in the proportion of Units held by them.
  • Each unit has a fixed maturity period. After that time, the investor returns the unit & get back his initial investment /money.  
  • Latest regarding Mutual Funds: A large number of Mutual Fund managers had invested money in bonds issued by IL&FS, which suffered a loss after the crisis. In fear, people stopped investing money in all Mutual Funds, hitting this sector very hard.

Types of Mutual Funds

It can be classified in many ways

1 . Portfolio Nature

Equity Mutual Funds Invest only in Equity
Debt Mutual Funds Invest only in Debt instruments
Gilt Edged Mutual Funds Invest only in Gilt Edged Bonds only ( and thus have very less return )

2. Income & Risk

Growth Fund Eg : Equity (80%) & Debt (20%)
Balanced Fund Eg  : Equity : Debt = 50:50
Income Fund Eg :  Equity : Debt = 20:80

2. Hedge funds

Hedge funds
  • The hedge fund is open to a limited range of very high net worth individuals (HNI). In simple words, it is a private Mutual Fund for High Net-worth Individuals 
  • Their only aim is to get maximum return in the quickest time.
  • Under this, HNI individuals give money to the Hedge Fund Manager in return for units with the promise of high returns. Hedge Fund Manager then play in the market to make money in different ways like investing in junk bonds, Arbitrage, Leverage, Short Selling etc.
  • SEBI Regulations on hedge Funds 
    • Each member must be paying at least ₹1 crore.
    • SEBI has placed strict norms on Hedge Funds. 
  • Examples of Hedge Funds Managers in India: Karvy Capital, Motilal Ostwald etc.
  • Technically they are Alternate Investment Funds (AIF) Cat III.

Side Topic: Alternative Investment Funds

It is a technical classification under SEBI norms:

1. AIF Category I

  • They generate positive spillover effects on the economy
  • E.g., Venture Capital Funds, Angel investors funds, SME Funds, social venture funds, infrastructure funds. 
  • SEBI norms are easy on them.

2. AIF Category II

  • Neither in Cat-1 nor Cat-3. E.g. Private Equity or debt fund. 

3. AIF Category III

  • The AIF Category III funds indulge in excessively risky investments to generate high returns in a short time. 
  • E.g. Hedge Funds. 
  • SEBI norms are stricter; otherwise, they may destabilize the capital market. 

3. REITs: Real Estate Investment Trusts

  • REITs are for High Net-worth Individual (HNI), and the Minimum Investment in REITs can be ₹ 2 lakh.
  • SEBI regulates REIT Fund Managers.
  • REIT Fund Managers give Units to investors and invest money in Real Estate Projects on the verge of completion but finding it difficult to raise loans from Banks or other NBFCs.  
  • When a real estate project completes and starts generating rent, they get their share of the rent from that which is paid to investors based on the proportion of units held by them. 

4. InvITs

  • InvITs are Infrastructure Investment Trust. 
  • InvITs are the same as REITs, with the only difference being that they invest in Infrastructure Projects like airports, highways, ports, gas grids etc.
  • RBI has allowed Banks to invest 10% of net owned funds in REITs & InvITs. Further, IRDAI has allowed insurers to invest in InvITs and REITs subject to the condition that they can’t invest more than 10% of their outstanding investment in single InvITs and REITs.

National Highways Authority of India (NHAI) launched its InvIT in FY22 to facilitate the monetization of roads and attract foreign and domestic institutional investors to invest in the roads sector. 

Benefits of REITs & InvITs

  • These instruments are successfully tried & tested in the US, UK, Australia, Japan etc.
  • Stressed developers can get new finance and help complete projects facing financial crunch.
  • It has the potential to help in saving banks from NPAs.
  • REITs and InvITs provide new investment opportunities to people.
  • They will help to channel household savings towards nation-building.

5. Sovereign Wealth Fund

Sovereign Wealth Fund
  • These funds are sovereign, i.e. under the direct control of the nation-state.
  • Sovereign Wealth Funds are state-owned investment funds, wherein the country parks its surplus budget. This money is later used in making investments and earning more money in return. 
  • Examples: Abu Dhabi Investment Authority (ADIA) ‘s funds, Qatar Investment Authority (QIA), Saudi Arabia’s Public Investment Fund etc.

6. P-Notes / Participatory Notes

P Notes
  • Suppose a foreigner wishes to invest in India but does not want to go through the hassles of registering with SEBI, getting a PAN card number, opening a DEMAT account etc. So, he will approach SEBI registered foreign institutional investors (FII) such as Morgan Stanley, Citigroup or Goldman Sachs. He will pay them & instruct them to purchase particular shares and bonds on his behalf and store them in their Demat account. FII will give him P-Notes in return, and he will receive interest and dividends accordingly. He may also sell those P-notes to a third party. The P-Note holder also does not enjoy any voting rights in relation to security referenced by the P-Note.
  • In simple terms, P-Notes are Offshore derivative Instruments that derive the value from the underlying Indian shares and bonds. 

P-Notes are considered harmful to Indian economy because:

  • P-note investors are not directly registered with SEBI; the identity of the actual investor and source of funds remain disguised. Hence, it may allow India’s ‘black money’ stashed away from India through ‘hawala’ to get invested back in the market. Again, ‘terrorist organizations’ might have been using this route, too. 
  • If the P-Note owner sells his P-Notes to another foreign investor, the Government of India will be deprived of taxes. (Compared to a scenario where an Indian shareowner sells his shares to another Indian investor, the government gets securities transaction tax and capital gains tax on his profit).

=> Therefore, SEBI is tightening the control over P-Notes. 

Stock Exchanges

Last Update: May 2023 (Stock Exchanges)

Stock Exchanges

This article deals with ‘Stock Exchanges.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Shares are issued through IPO in the Primary market. Then, they can be resold at the secondary market, commonly known as the Share market or Stock Exchange.

Stock Exchanges

Facts about Stock Exchanges

  • Worlds first stock market was opened in Amsterdam Stock Exchange in 1631, followed by London Stock Exchange in 1773.
  • Bombay Stock Exchange was the first to be opened in India (and Asia) in 1875, followed by Ahmedabad and Kolkata.
  • States have their own Stock Exchanges as well. E.g., Punjab’s Stock Exchange is in Ludhiana.
  • The world’s five largest stock exchanges are (1) New York Stock Exchange, (2) NASDAQ, (3) Tokyo Stock Exchange, (4) London Stock Exchange and (5) the Bombay Stock Exchange. 
  • In 2018, the Bombay Stock Exchange(BSE) became the first Indian exchange to be designated as a ‘Designated Offshore Securities Market’ (DOSM) by the US Securities and Exchange Commission (SEC). DOSM status allows the sale of securities to US investors through the trading venue of BSE without registration of such securities with the US SEC, which eases the trades by US investors in India. Other Stock Exchanges with DOSM Status are London Stock Exchange, Bourse de Luxembourg, Tokyo Stock Exchange and Toronto Stock Exchange. 

Players in Stock Exchanges

1. Broker

  • A broker is a registered stock exchange member who buys or sells shares/securities on his client’s behalf and charges a commission.

2 . Jobber

  • A jobber is a broker’s broker or one who specialises in specific securities catering to the need of other brokers.

3 . Market-Maker

  • Market Maker is an intermediary in the market ready to buy and sell securities and quotes two-way rates.

Stock Exchanges in India

There are 27 Stock Exchanges in India – 7 at the national level and 20 at the regional level.

Bombay Stock Exchange (BSE)

  • Earlier, BSE was a regional stock exchange and converted to a national exchange in 2002.
  • It is the biggest stock exchange in India, accounting for 75% of total stocks traded in India and the fifth largest in the world based on market capitalisation.
  • BSE’s flagship index is Sensex.

Side Topic: Specific problems of share market before 1992

1. Monopoly of Bombay Stock Exchange (BSE)

  • There were almost 20 regional stock markets in 1992, but BSE enjoyed a monopoly.
  • Users from outside Bombay found it extremely difficult to trade in BSE due to poor technology & the high cost of telecommunication.
  • BSE imposed a high entry barrier, so competition among brokers was absent. Services provided by brokers were highly inefficient & costly.

2. Open outcry system

  • Trading used to take place in the trading ring where non-brokers were not allowed in & these traders used to shout prices.
  • There wasn’t any mechanism to verify the prices at which trading actually took place.

3. Badla System

  • Under Badla System, settlement of share used to happen on T+72 days basis. It means that if the investor has bought shares today, he got real possession of shares after 72 days.
  • Presently, T+2 System is in place, i.e. settlement has to happen in 2 days. In Jan 2023, T+1 settlement cycle was started trades in top listed securities.
T Plus System of Settlement
The Lower Settlement period has many benefits to the system
  • It reduced the capital to collateralise the risk of unsettled deals.
  • It helped in reducing the systemic risks.

4. Bad Delivery of Shares

  • Once you buy a share, you have to send these shares to the registrar of the company to register ownership of the share in your name. 
  • But the problem of bad delivery of share can happen. For example, if the signature of the seller didn’t match with one maintained with the registrar, the share would be sent back.

To tackle all these problems

  1. The government made law to give power to SEBI to control primary & secondary markets. 
  2. And to end the monopoly of BSE, a new national-level stock exchange NSE was opened.
  3. BADLA System (T+72) system was changed to T+2, i.e. settlement has to be completed in 2 days.

NSE (National Stock Exchange)

  • NSE is located in Mumbai. It was established in 1992 & started trading in 1993.
  • Promoted & managed by public sector financial institutions – IDBI, UTI, LIC, GIC, SBI& IDFC & foreign investors like Citigroup. 
  • It is professionally managed (as opposed to brokers).
  • NSE’s flagship index is S&P’s CRISIL NIFTY-50.
  • From 2022, Indian investors will be able to trade in the stocks of 50 leading US companies through the NSE International Exchange, a subsidiary of NSE

4 Innovations of NSE which changed all stock exchanges in India

1. Computerized Trading

  • Trading was done in front of investors leading to Transparency.

2. Satellite Communication

  • To spread the reach of exchange to all over the country.

3. Professional Managers

  • Traditional stock exchanges were managed by Brokers leading to a rise in malpractices. Since Brokers themselves were in-charge of enforcement, they never took decisions against themselves.
  • In NSE, enforcement was entrusted to professional managers.

4. Weekly settlements

  • T+72 system was replaced with weekly settlements.

Result –  NSE busted BSE

  • Equity trading at NSE commenced in 1993.
  • Within one year, NSE surpassed BSE in terms of turnover.

Good things happened due to NSE

  • Cartelisation of brokers ended
  • Led to higher Transparency
  • More brokers lead to competition & less commission
  • No more bad delivery of shares (due to Demat account)
  • Investors from outside Mumbai were also able to invest.

Later, BSE also introduced similar changes to remain in the market.

Regional Exchanges

There is a total of 20 regional stock exchanges in India.

Ludhiana (established in 1983) Jaipur Ahmedabad (1894 – first Regional Exchange) Indore Pune
New Delhi Meerut Rajkot Vadodara Hyderabad
Mangalore Bangalore Ernakulam Coimbatore Madras
Patna Kanpur Bhubaneshwar Kolkata Guwahati


  • Sensex = Sensitive Index (Full Name – S&P BSE SENSEX)
  • It is a popular Equity Index of the Bombay Stock Exchange (BSE).
  • It was started in 1986.

Concept of Free Float Market Capitalisation

  • To understand how SENSEX is calculated, we must know Free Float Market Capitalisation.
  • Free Float Market Capitalisation = Total Price of all the shares in the market on that day (excluding with company) 
  • Suppose in 1979; Company launched IPO with 1 lakh shares. 30,000 shares were bought by the Promoter (owner), and the public bought 70,000 shares. Assume Price of each share in 1979 was ₹10. Hence, the Free Float Market Capitalisation of the Company in 1979 was ₹ 7 lakh (10 X 70,000).
  • Later, if the Price of Shares increases, Free Float Market Capitalisation will change as well (as explained in the infographic below)
SENSEX Calculation
Stock Exchanges

How SENSEX is calculated??

How SENSEX is calculated
  • Base Year – 1978-79
  • Measured using the weighted average of the 30 largest companies traded in BSE & these companies keep on changing based on market capitalization.

When does Share Market go up or down?

When Share Market/SENSEX Go Down 1. War
2. Inflation
3. Political Instability
When Share Market/SENSEX Go up 1. Soft monetary Policy
2. Relaxing FDI norms
3. Merger & Acquisition Rumours

Other such indexes

SENSEX BSE + (S&P)  => 30 Companies
NIFTY NSE (+ CRISIL) => 50 Companies
Nikkei Tokyo Stock Exchange (225 Companies)
Dow Jones USA

Securities & Exchange Board of India (SEBI)

  • SEBI is the regulator of the Indian stock market.
  • It is headquartered in Mumbai. 
  • The Board of SEBI comprises nine members, excluding the chairman.


  • Regulator of Securities (Shares, Bonds, Debentures etc.).
  • Regulatory oversight over places (Stock Exchanges, Depositories etc.) and Persons (Brokers, MF Managers, Inside Trader) 
  • Regulates any Collective Investment Scheme of or more than ₹100 crores.
  • Promote financial literacy of investors. 

Journey till now

1988 SEBI was formed via Executive Order.
1992 SEBI became a Statutory Body.
2014 SEBI Act amended to give powers to search, seize, and arrest to SEBI and all Collective Investment Schemes of more than ₹ 100 crores was placed under the regulation of SEBI. 
2015 Forward Market Commission scrapped and Commodity markets were placed under the regulation of SEBI.

Commodity Exchanges

  • Commodity trading happens similar to ‘stock trading’ in the stock market. But in contrast to stocks, commodities are actual physical goods such as wheat, oil, gold etc.
  • Futures are contracts for commodities that are traded on exchanges. Commodity futures serve a great purpose by hedging participants against price fluctuations. Take the example of agriculture. 
    1. A corn farmer can sell ‘corn futures’ on a commodity exchange. It will lock the sale price of a specified quantity of wheat at a future date, protecting the farmer from price fluctuations.
    2. Corn mill can purchase the corn futures from the exchange and fix its future purchase cost for a specified quantity of corn. 
  • There are 21 commodity exchanges in India, including three ‘national level’ exchanges, i.e. Multi-commodity Exchange of India Ltd. (MCX), Mumbai; National Commodity and Derivatives Exchange Ltd. (NCDEX), Mumbai and National Multi-commodity Exchange of India Ltd. (NMCE), Ahmedabad.
  • SEBI regulates Commodity Exchanges. Earlier, Forward Market Commission (FMC) was the regulator of Commodity Exchanges, but the Government of India merged the FMC with the SEBI in September 2015.

Social Stock Exchange

  • Social Stock Exchange is a separate segment of the existing Stock Exchange that helps Social Enterprise(s) raise funds from the public through the stock exchange mechanism. 
  • In 2023, National Stock Exchange (NSE) got the approval from the SEBI to launch its Social Stock Exchange.
  • Not For Profit Organizations and For Profit Organizations with aim of making positive impact on the society are eligible to be listed on SSE.

Social Stock Exchange

Type of Securities

Last Updated: May 2023 (Type of Securities)

Type of Securities

This article deals with ‘Type of Securities.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

What is Security instrument?

Securities are fungible and tradable financial instruments that are used to raise capital from public and private markets.

There are three types of Securities, i.e. (1) Debt, (2) Equity and (3) Derivatives.

Type of Securities

Security Market

  • It is the segment of the financial market of an economy where long term capital is raised via security instruments such as Debt, Equity and Derivatives. 
  • There are different ways to classify Security Markets.

Classification 1: Type of Security being Traded

Type of Securities

Classification 2: By Tenure of Securities

Classification 2: By Tenure of Securities

Classification 3: By Freshness of Security

Classification by Freshness of Security

Classification 4: By Settlement of Security

Classification by Settlement of Security

Different Instruments to raise Money from the Market

  • Consider a hypothetical situation – A businessman has ₹5 Lakh & to start a business, he needs ₹10 Lakh. Now the question arises that, how can he arrange the rest 5 Lakhs? Answer – He can approach Security Market to raise capital via Debt or Equity.
  • In general, if anybody wants to start a business, he/she will need 4 factors of production
Entrepreneurship Land
Capital Labour
  • And to arrange these factors of production, one needs a truckload of money which can be raised via Debt or Equity. These instruments have their advantages and disadvantages, which we will discuss in detail in the chapter.
Different instruments to raise money from the market

Debt Instruments

  • It is self-explanatory, i.e., you borrow money from someone & say that I will give you 10% annual interest for 5 years & at the end will pay you principle (minimum period more than 1 year).
  • It is a type of security paper.
  • If a company raises money via debt, it will have to pay the debt owner whether it is in profit or loss. 
  • Examples of debt include Bonds, Debentures, External Commercial Borrowing, T-Bills, Commercial Papers, Certificate of deposit etc.
  • The holder of the debt instrument is called the Creditor of the Company (not the owner).
  • Benefits of becoming Creditor 
    • Fixed Income whether the company is making profit or loss.
    • First claim during liquidity.

Short and Long-Term Debt Instruments

Short and Long-Term Debt Instruments

#1: Short-Term Debt Instruments

  • They have a maturity period of less than 1 year.
  • The market where they are sold is called Money Market.
  • They are highly liquid as they can be sold and resold very easily. 
  • These are sold at a discount to face value and bought at face value after a fixed number of days (all Short Term Debt instruments that are mentioned below are sold and purchased in this way)
  • E.g., T-Bill issued by the government for a period of up to 14 days.
T Bill

Short Term Debt Instruments issued by various agencies

1 . Government

1.1 T-Bills or Treasury Bills

  • T-Bills have a maturity period of 14, 91, 182 or 364 days.
  • Treasury bills are zero-coupon securities as they don’t pay interest. They are issued on a discount to face value and redeemed at face value upon maturity.
  • Note: State Governments don’t issue T-Bills (till 2001, they used to issue, but RBI stopped this in 2001).

1.2 Cash Management Bills (CMB)

  • They can have a maturity period of up to 90 days.

1.3 Ways & Means Advances

  • The mechanism through which RBI lends money to the government for temporary short term needs when there is a mismatch in receipt and expenditure of the government.

2 . Companies

  • Commercial Papers
  • Promissory Notes

Both work the same as T-Bills but are issued by Companies.

3 . Banks

  • Certificate of Deposits: Work same as T-Bills.
  • Call Money: Banks inter-borrow among themselves for 1 day for CRR Adjustment.
  • Notice Money: Same as Call Money but for a period between 2 to 14 days.
  • Repo Agreements: Monetary Policy instrument under which bank lends from RBI for up to 14 days.

4 . Merchant

  • Commercial Bill: Merchant sells his unpaid invoice to bank at a discount and again buys the same invoice at face value when recovery date of invoice arrives.

5 . MSMEs

  • Factoring: Under Factoring, MSME owner pledges his unpaid invoice made to Corporates to Bank or NBFC at a discount and then again buys invoice at face value when recovery date of invoice arrives. It is conducted through electronic system called Trade Receivables Electronic Discounting System (Treds).

Side Topic: Credit Rating

Before reading about Long Term Debt Instruments, we need to know Credit Rating and Bond Yield.

  • Credit Rating is the process to access the creditworthiness of a prospective borrower to meet future debt obligations.
  • Credit Rating can be given to individuals, individual companies & countries (sovereign).
  • SEBI regulations mandate that the company’s credit rating is required to raise money via a debt instrument having a maturity period greater than 18 months.
  • Usually, equity share is not rated here. 
  • The interest rate paid on Bonds is not fixed & depend on the credit rating of the entity issuing that:-
    1. Companies and countries with high credit ratings are least to default on their loans. Hence, the interest rate on bonds issued by them is the lowest (Gilt Edged).
    2. Companies and countries with low credit ratings are most likely to default on their loans. Hence, to attract buyers, they have to offer a high-interest rate. 
Credit Ratings
  • Companies that do the work of Credit Rating are known as Credit Rating Companies. These include  Fitch, CRISIL, S&P, Moody’s etc. and they give rating like AAA,A,BBB,BB,C,D etc.
  • In India, Credit rating agencies are regulated by SEBI under SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange Board of India Act, 1992. Presently, we have seven domestic rating agencies
    1. Acuite Rating and Research
    2. Brickwork Ratings
    3. CARE Ratings
    4. CRISIL Ratings
    5. ICRA
    6. India Ratings and Research
    7. Infomercial Valuation and Rating
  • Credit Rating of Individual Persons are maintained by Credit Information Companies (CIC) such as Equifax, CIBIL TransUnion etc. 

Side Note: Gilt Edged vs Junk Bond

1. Junk Bond

  • Junk Bonds are also known as High Yield Bond.
  • If a company has a low rating like C& D issue bonds, nobody will invest in them because they are insecure.
  • They offer a high-interest rate like 15-17% to seduce investors.

2. Gilt Edged Bond

  • Gilt Edged Bonds are issued by companies and countries with high credit ratings. 
  • These bonds are highly secure. 
  • They offer very low interest, like 1 to 4%

Side Topic: Bond Yield

Bond Yields, in essence, shows the financial return the owner of the bond is going to get from the bond at any given time. The simplest version of yield is calculated in the following manner:

How to calculate Bond Yield

If the bond price remains constant (i.e., equal to the face value), then the yield of the bond is the same as the interest rate. But the Bond prices seldom remain constant and are subject to change.

Bond Yield is the profit percentage that an investor is earning from the given bond. It is calculated by dividing interest earned by the investor with the Par Value of Bond for that investor.  

Bond Yield

Bond Yield increases in two cases

  • During Boom Period: In this period, the investor is interested in investing his money in companies likely to grow faster and sell his existing bonds even at a lesser value to invest his money in growing companies.
  • When the country’s economy is about to collapse, investors try to sell it at lower rates before sovereign default and get whatever they can. The implication is that when the government issues new shares, the government has to offer very high interest (greater than the Bond Yield of earlier floating bonds) to attract investors toward new bonds. 

Bond Yield on G-Secs

  • The yields on 10-year G-sec, which had reached 8.2 per cent on 26th September 2018, reduced substantially to reach 5.75 per cent in June 2020. It has since then increased to stand at 6.45 per cent as of 31st December 2021.
Bond Yield on G-Secs Trend

#2: Long Term Debt Instruments

  • Long Term Debt Instruments have a period of maturity greater than 1 year.
  • They are sold in called Capital Market.


Types of Long Term Debt Instruments

2.1 Long-Term Debt Instruments issued by Governments

2.1.1 Coupon Bonds

  • Coupons bonds are bonds issued by the government with Coupons attached to them. The person who has bought the Coupon Bond can get interest each year by tearing the coupon from the bond and giving it to the designated authority. The person will get his initial amount back by giving back Coupon Bond at the maturity period. 
Coupon Bonds

2.1.2 Bearer Bonds

  • They are regular bonds, but they don’t have the holder name. 
  • Nobody can keep a record of them because no name is written on them. Hence, it can be easily used in money laundering and illegal activities. 

Why do Governments issue bearer bonds?

  • When the Government is in dire need of money like at the time of war, they can’t go in a lengthy procedure of checking the credentials.

Note: Currency is Zero Interest Bearer Bond.

Bearer Bonds

2.1.3 Inflation Index Bonds

  • If interest offered by the bond is less than the inflation, a person who has invested in these bonds will lose his money’s purchasing power. Hence, in these situations, people start to invest in Gold to preserve the purchasing power of their hard-earned cash, thereby increasing the Current Account Deficit and weakening the rupee further. 
Inflation Index Bonds
  • To deal with such situations, the Government of India came up with Inflation Index Bonds in 1997, 2013 and 2018 to provide positive real interest rates to households, thereby reducing Gold consumption.
  • Inflation-indexed bonds provide returns that are always in excess of inflation, ensuring that price rise does not erode the value of savings. 
  • In Inflation Index Bonds, Interest Rate is relative to the inflation in the economy. Eg : CPI + 1.5% or WPI + 2.0% .

2.1.4 Sovereign Gold Bond

  • RBI issues Sovereign Gold Bonds on behalf of the government to deal with the problem of gold imports in India.
  • These bonds are denominated in Gold Grams, and apart from that, the interest of 2.5 to 2.75% is also given. At the end of the tenure of a bond, the person gets an amount equivalent to prevailing gold prices at that time, along with interest. 
Sovereign Gold Bond

2.1.5 Municipal Bond

  • Municipal Bonds are issued by Municipal Corporations.
  • In India, Bangalore Municipal Corporation was the first to launch Municipal Bond in 1997. Other Municipal Corporations like Ahmedabad, Surat, Pune, Indore, Lucknow, Vadodara etc., have also used this route.
  • Municipalities are permitted to raise up to ₹10,000 crores via Municipal Bonds.
  • The urban local bodies (ULBs) are encouraged to tap the bond market under the AMRUT scheme. 

Need of Municipal Bonds

  • Smart Cities & Municipal Bonds: To build smart cities, we need a huge capital, which can be raised via Municipal Bonds. 
  • Financial Crunch of Urban Local Bodies (ULBs): ULBs need to gather huge funds from all available sources to improve the conditions of urban infrastructure. Municipal bonds are a good option.
  • Committee on urban infrastructure headed by Isher Judge Ahluwalia (2011) had estimated that Indian cities would need to invest around ₹ 40 trillion at constant prices in the two decades till 2031 in urban infrastructure.  
  • 14th Finance Commission & Niti Aayog’s 3-Year Agenda also recognise the role of Municipal Bonds in building Urban Infrastructure.
  • Financial discipline: Raising money from capital markets incentivises municipal corporations to fund new projects and encourages them to become financially disciplined and governance oriented


  • Municipal Bonds are not time tested, and it won’t be easy to attract investors.
  • It can also be a source of inequalities because the better rated municipal corporations would corner most of the investment, crowding out the investment for the already infrastructurally backward cities.       
  • PFRDA classifies municipal bonds as Class C instruments instead of Class G (Government securities), making them compete with other Class C instruments having higher yields, thus making municipal bonds unattractive. 
  • Most of the Municipalities under Smart City Projects are below BBB- ratings on S&P which means below investment grade.
  • It will be a challenge to use the capital raised via Municipal Bonds. ULBs can’t absorb huge funds
  • No tax benefits: Unlike many Western countries, there are no special tax benefits.

The way forward: Denmark has an agency to protect bondholders if one city in the pool defaults. The Indian government can look into the feasibility of this to instil confidence in the minds of investors.

2.1.6 Consol Bonds

  • Consol Bond is the short form used for ‘Consolidated Bond‘.
  • Features of Consol Bond
    1. It doesn’t have any maturity date.
    2. It has an annual interest rate of 4-5% for perpetuity (but will not return principal).
    3. However, the government can buy back the bond when it has sufficient money.
  • It was in the news because during the Covid pandemic, economists argued for issuing such bonds to revive the economy.

2.1.7 Oil Bonds

Before 2010 for petrol and 2014 for diesel, the government forced the oil marketing companies to sell oil at subsidised rates. Instead of paying the oil companies for their losses, the government issued them oil bonds to contain the fiscal deficit.

Features of Oil Bonds

  1. These Oil Bonds were Long Term (15 -20 years) Government Securities.
  2. They weren’t considered while calculating Fiscal Deficit, but they were part of Public Debt.
  3. They aren’t considered in the SLR requirements of Banks.

2.2 Long-Term Debt Instruments issued by Companies

They are of various types

2.2.1 Redeemable Bonds

  • The company will pay regular interest and return the principal on maturity. 

2.2.2 Irredeemable Bonds

  • The company will pay only interest, but the principal is not returned.

2.2.3 Partially Convertible Debenture

  • The company will pay interest, but at the time of maturity, some portion of the bonds will be converted to shares, and on the rest, the principal will be repaid. 
  • Eg : 70% Debenture + 30% Share .

2.2.4 Fully Convertible

  • The company will pay interest, but at maturity, bonds will be converted to shares (and the principal is not paid).

2.2.5 Optionally Fully Convertible Debentures

  • The company will pay interest, but at the time of maturity, the company can give the investor an option to convert his bonds/ debentures to shares (just an option that the investor can accept or reject). But the ‘rate’, will be decided by the company (i.e., how many shares against how many debentures). 

2.3 Long Term Debt Instruments issued by World Bank

International Finance Corporation (IFC) (organ of World Bank) helps in raising offshore capital via various types of Offshore Bonds called Panda Bonds (for China), Kangaroo Bonds (for Australia) and Masala & Maharaja Bonds (for India).

2.3.1 Masala Bond

  • These are offshore ₹ denominated bonds.   
    1. They are known as Masala Bonds because India is famous for Spices (Formosa Bonds for Taiwan, Samba Bonds for Brazil, Samurai Bond for Japan). 
    2. They are called ‘Offshore‘ because they are floated in London and other foreign Exchanges.
    3. ‘₹ denominated’ because they are sold & bought in ₹ (& not $).
  • Benefits of Masala Bond
    1. They help in fighting local currency volatility. The investor must bear the currency volatility in Masala Bonds because they buy these bonds in Rupee and later get back their principal and interest in Rupee. 
    2. Interest Rate is also low because they are issued by World Bank (IFC) and not the company itself. Hence, they are very secure (Aaa rated) because in case the company refuses to pay, World Bank will pay on its behalf.
  • The move to permit Masala bonds is an attempt to increase the international status of ₹ and is also a step toward full currency convertibility.
Masala Bond

Recent activities in Masala Bonds

  • Indian Railway Finance Corporation (IRFC) has raised $ 1 billion via Masala Bonds.
  • NHAI raised capital via Masala Bonds to fund their highway projects.
  • Kerala Government’s Kerala Infrastructure Investment Fund Board raised capital via Masala Bonds, becoming the first state. 

2.3.2 Maharaja Bonds

  • Rupee Denominated Bond issued in India by World Bank’s IFC.
  • Maharaja Bonds are the same as Masala Bond, but these bonds are issued in India.
  • They are also ‘Aaa’ rated, so interest rates are very low. 
Maharaja Bonds

Side Topic: Formosa Bonds

  • Formosa bonds are bonds issued in Taiwan and denominated in currencies other than the Taiwanese Dollar. 
  • Formosa bonds are issued by foreign companies in Taiwan. 
  • In 2022, SBI has raised $300 million from Taiwan in the form of Formosa Bonds. 

Appendix: Offshore Bonds

  Currency of Bond Issued in which country Who issues?
Masala Bond Rupee denominated Outside India Indian Companies and IFC
Maharaja Bond Rupee denominated Inside India IFC
Uridashi Masala Bond Rupee denominated Japan Indian Companies
Panda Bond Yuan denominated China Foreign Companies
Dim Sum Bond Yuan denominated Hong Kong Foreign Companies
Samurai Bond Yen denominated Japan Foreign Companies
Yankee Bond Dollar denominated USA Foreign Companies
Formosa Bond Denominated in currencies other than Taiwanese Dollar Taiwan Foreign Companies

2.4  Miscellaneous Type of Long Debt Instruments

2.4.1 Social Impact Bond

  • Social Impact Bonds are offered to High Net worth Individuals (HNI) interested in doing philanthropic works like Bill Gates, Premji, Ratan Tata etc. Although interest offered on these Bonds is lower than general bonds, they aim to do social welfare.
  • E.g. : 
    1. NGO named Educate Girls issued Social Development Bonds to raise money to educate girls in India.
    2. SIDBI issued Women’s Livelihood Bonds to invest in projects targeted at improving the livelihood of women. 
    3. In 2021, Pimpri Chinchwad Municipal Corporation signed MoU with UNDP to launch Social Impact Bond to raise capital to improve residents’ healthcare services. 

Social Impact Bond

2.4.2 Green Bonds

  • The green bond is a type of long term bond, but the issuer of a green bond publicly states that capital is being raised to fund ‘green’ (environment friendly) projects, like renewable energy, clean transportation etc. There is no standard definition of green bonds as of now.
Green Bonds
  • Examples of Green Bonds 
    1. World’s first Green Bond was launched by World Bank (2007).
    2. India’s first Green Bond was launched by Yes Bank (2015).
    3. Indian Renewable Energy Development Agency (IREDA) launched India’s first Masala Green Bond at London Stock Exchange (2018).
    4. CLP India (Wind Energy Company) was the first Indian company to tap this route.
    5. In 2022, Indian government announced that it is planning to launch Sovereign Green Bonds.
  • India became the seventh-largest green bond market in the world in 2017. 

Side Topic: Blue Bonds

  • The concept of Blue Bonds is the same as Green Bonds.
  • The issuer publicly states that capital is being raised to fund climate-resilient water conservation or marine protection projects.
  • Seychelles (a small island nation in the Indian Ocean) issued the world’s first Blue Bond in 2018 for marine protection and sustainable fishery projects.

2.4.3 Catastrophe Bond

  • Catastrophe Bonds are high-yield bonds issued by Insurance Companies. Their interest can be as high as 18%, but if a natural disaster happens, then the principal is returned (although if a natural disaster doesn’t occur within the tenure of bond, the principal is returned).
  • They are frequently issued in developed western countries. 
  • Suggestion: Indian Insurance Companies can also use this. 


  • The basic concept behind equity: You borrow money from someone & in return, you offer a partnership. 
  • Equity holders are called owners/ proprietors of the company.
  • Equity holders are given dividends in case the company earns a profit. But they have the last claim during the liquidation of the company.

Types of Equity /Shares 

There are two types of shares

1. Ordinary shares

  • They are the most common type of Shares.
  • Ordinary shareholders have voting power in shareholders’ meetings, and they have the last claim during liquidation.

2. Preference shares

  • Although retail investors are also eligible, they are generally issued to banks by companies.
  • Preference is given to them in the following things.
    1. Holders of Preference Shares are given dividends even if equity shareholders are not.
    2. When a company is to be closed, preference shareholders are given money first from the proceeds of sales of the company’s assets.
    3. They may have enhanced voting rights such as the ability to veto mergers or acquisitions or the right to the first refusal when new shares are issued.

Order of Claim

Bond (Debenture) > Preferential share > Ordinary Share

Terminology in Shares

Face Value and Par Value of Shares

1. Face Value

  • Face Value is the value of the share written on the share itself.
  • It can be any integer – 1, 2, 3 ___25, 50, 100 (But can’t be decimal like 1.50) . 
  • Condition: When IPO is issued, the company cannot sell Share below its Face Value. 

2. Par Value

  • Par Value is the market-determined value of the share.
  • When IPO is launched, Par Value can’t be lower than Face Value. After that, the Par value is decided by the market forces. It can be lower or greater than face value.

3. Premium

  • If the company is doing well, a person can think that he can get a big dividend when the dividend is announced. So he can buy those shares from the Share Market at a greater price than its Face Value. 
  • The value above Face Value is called Premium. For example, if the above share having a face value of ₹50 is selling at ₹ 70, its Premium is ₹ 20.

Digital Shares

Digital Shares

Problems with Paper Shares

  • Delivery Problem
  • Fear of Theft
  • Transfer delays leading to speculations

Demat Account

  • Demat Account is the short form for Dematerialised Account.
  • This system was started in the mid-1990s.
  • Earlier, when investors bought shares, they got a certificate.
  • But now, the shares are electronically transferred to the investor’s account, known as the Demat account.


  • It is like a bank locker where securities are held in physical form.
  • In India, there are two depositories
    1. National Securities Depository Limited (NSDL) 
    2. Central Depository Service Limited (CDSL)

Depository Participant (DP)

  • Depository Participants are the agents of depositories acting as an intermediary between the depository and the investors.
  • The customer must open a “Demat” account in a depository-partner (DP) which can be a bank or an NBFC.
  • E.g., ICICI, HDFC, SBI etc.

IPO (Initial Public Offer)

IPO - Initial Public Offer

When a company sell the shares for the first time to the public, it is called IPO.

Red Herring Prospectus

  • Before the company launches its IPO to get capital via equity finance, the company has to give Red Herring Prospectus mentioning all the information about their promoters, business plan, address etc. (all details except on which date IPO would be launched & what would be the price of IPO).
  • Only when SEBI approves they have the permission to go ahead.


  • Underwriters are the companies who do lengthy legal work & accounting before launching IPO that require CA, Corporate Lawyers etc. They charge a commission for providing these services.
  • E.g.: Mahindra, ICICI etc.

How price of an IPO would be fixed?

Two methods

Method 1: Fixed Pricing Method

  • Suppose the company announces face value and premium in advance. Eg 
    1. Face value = ₹ 10
    2. Premium = ₹15
    3. Final Price = ₹25
    4.  1 lakh such shares will be issued 
  • Hence, it would be announced that ₹25 Lakh IPO would be launched in the market.

Method 2: Book Building Method

  • Suppose the application for 1 Lakh shares are invited, and investors are asked to send applications at which price they want to get these shares. E.g., 
Quoted price of share Number of Applications received
₹ 500 X 10,000
₹200 X 50,000
₹ 125 X 40,000
₹100X 500
And so on  
  • In the above example, at ₹125, all 1 Lakh shares have been booked. Hence, the face value of each share will be fixed at ₹125, and all shares will be sold at Rs 125 per share.
  • Hence, all the shares are sold at face value in this case.

Follow-up Public Offer (FPO)

  • If the company has already issued shares previously and now issuing more shares to obtain more capital, it is called Follow-up Public Offer.
  • It is obligatory for the company that it can offer FPO only to the existing shareholders of the company, known as the Rights issue of share.
  • If the company doesn’t want the rights issue of a share, the company will have to hold a general meeting of shareholders & pass a resolution about it.

American Depository Receipts(ADR) & Bharat Depository Receipts

1. American Depository Receipts (ADR)

  • If Indian Company wants to issue their shares in the USA, they can’t do it directly as they will have to register in the USA and comply with other domestic regulations. 
  • Hence, to simplify the matters, the Indian Company can sell its shares to American Intermediary (e.g. Bank of America). The Bank can issue an equivalent amount of American Depository Receipts, which Americans can buy from US Stock Exchanges. 
  • When an Indian Company issues a dividend, they will give that to American Intermediary, and American Intermediary will distribute it to ADR Holders.
American Depository Receipts (ADR)

2. Global Depository Receipts (GDR)

  • GDR is same as ADR for European Union countries.

3. Bharat Depository Receipts (BDR)

  • BDR is opposite to ADR.
  • It is used when foreign companies want to issue shares in India. 
Bharat Depository Receipts (BDR)

Other Terms associated with Shares

1. Share Buyback

  • Share Buyback is the process when corporations repurchase the stock it has issued.
  • It reduces the number of shares outstanding, giving each of the remaining shareholders a larger percentage of the company’s ownership.
  • Buyback prices are more than market prices.
  • According to the legal provisions, companies can buy back with reserves but can’t borrow to buyback.
  • Share Buyback has been allowed in India since 1998.
  • Reasons for buyback
    1. When companies have significant retained earnings, they don’t issue big dividends because a large amount of money will be wasted in tax. They generally use that money to buy back shares.      
    2. If management is optimistic about the future & believe that the current share price is undervalued.
    3. Putting unused cash into use.
    4. Raising earnings per share.
    5. Reducing the number of shareholders to reduce the cost of servicing them.

2. Employee Stock Option Plan (ESOP)

  • The company gives shares to employees at a discounted rate so that employees become more committed to the company’s success (if the company makes more profit, you make more profit).  Employees can sell these shares at a later date depending on the company’s share buyback policy.
  • Economic Survey (2020) has suggested that the government give ESOP to public sector banks’ employees to improve their performance.

3. Sweet Equity

  • If Company sells its shares to directors, employees etc. at a discount for their value addition like IPR & know-how. 

4. Penny Stocks and Blue Chip Stocks

Penny Stock Penny Stock are the shares whose market price remains excessively low compared to their face value. Such pathetic companies give zero or little dividends.
Blue Chip Stock Blue Chip Stock are the shares of a nationally recognized, well-established and financially sound company with a history of generating good dividends whose market price is very high than its face value.

5. Share Pledging

  • When a company raises a loan from the Bank or NBFC by pledging its shares as collateral.

6. Bull and Bear Investors

There are two types of investors

Bull Investors – Bulls represent charging.
– An optimistic speculator who purchases a particular share hoping that share prices will rise (to sell them later at a much higher price).
Bear Investors – Bears represent hibernation.
– A pessimistic speculator who fears that share prices will fall and sells his shares.

7. Short Selling

Short selling is a way to make money by betting that a company’s stock price will go down instead of up.

How it works?

Step 1
Short Selling Explained
Step 2
Short Selling Explained - Adani Case

The investor will experience a loss if the stock price increases, as he will have to pay more to repurchase their shares. Theoretically, this loss can be unlimited because there is no limit to the price of the stock. Hence, it is advisable to conduct proper research before involving in short selling.

Short selling was in news due to Hindenburg Adani issue.

Equity funding for Start-ups

1. Venture Capitalist

  • The venture capitalist is a company that is willing to invest in projects that are risky but have a promising prospect. Venture Capital bridges the gap where traditional sources of funds cannot participate actively in funding new ventures.
  • They deal only with big things- big projects & big investments.
  • Venture capitalist companies arrange this money either by borrowing from companies like mutual funds, pension funds, or they may issue their bonds.
  • They demand part in the company and seats in the company’s Board of Directors. Hence along with capital, Venture Capitalists also bring in smart advice, hands-on management support and other skills.
  • The venture capital industry in India is still at a nascent stage. To promote innovation, enterprise and conversion of scientific technology and knowledge-based ideas into commercial production, it is essential to encourage venture capital activity in India.
  • For decades, venture capitalists have nurtured the growth of America’s high technology and entrepreneurial communities. Companies such as Compaq, Sun Microsystems, Intel, Microsoft, and Genentech are famous examples of companies that received venture capital early in their development. Now, venture capitalists in India have a chance to do the same for Indian firms.
Venture Capital

2. Angel Investors

  • These are rich gentlemen who provide financial backing to entrepreneurs for starting their business’. Angel investors are usually found among an entrepreneur’s family and friends, but they may be from outside also. They can give debt or equity, but mostly they play in equity.
  • They are focused on helping the business succeed rather than reaping a huge profit from their investment.
  • What is the need for Angel Investors?
    • You can take capital from Banks, IPO or venture capitalists if your business project is likely to make success based on previous experience.
    • But if your idea is untested & new, nobody would be interested in financing you. E.g., Steve Jobs was funded by Angel Investor when he started Apple.
  • In India, examples of Angel Investors include Ratan Tata, who invested in Urban Ladder, and TVM Pai, who invested in ZoomCar.
  • Angel investors can be recognized as Category I Alternate Investment Fund (AIF).

3. Crowd Funding

  • Crowd Funding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet.  
  • Various platforms like Grex, LetsVenture, etc., provide this service in India.
  • This funding can be of various types. 
    • Equity-Based 
    • Debt Based 
    • Cause Based
    • Reward-Based 
  • A large number of startups, software developers, filmmakers (e.g. Kannada movie Lucia), music festivals (e.g. Control ALT Delete) etc., have raised funds via this platform.

Debt vs Equity


Pros 1. Don’t have to share ownership. 
2. Can claim an income tax deduction. 
3. Less paperwork & permissions. 
Cons 1. Even if the company doesn’t make a profit, it has to pay interest. 
2. Have to mortgage something to get a loan. 


Pros 1. No obligation to pay interest even if the company makes a profit.
2. Less tension compared to bank loans & debt.
Cons 1. Have to share ownership. 
2. Have to make the board of directors. 
3. Require heavy paperwork & time to initiate IPO. 


There is another type of security as well, known as Derivatives. We will have just an overview of this as it is not that important from an examination point of view.

Type of Securities

Question: What is derivative ?

  • The financial instrument that derives its price from some underlying asset is known as Derivatives.
  • The price of derivatives are directly dependent upon the underlying asset in the present & projected future trends, which can be equity, foreign exchange, commodity or mortgaged Backed securities etc.
  • For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of the underlying asset, i.e. wheat.

There are four types of Derivative contracts

1. Forward

  • A Forward is a contract between two parties to buy or sell an asset at a specified future time at a price agreed on in the contract.
Forward Derivatives)

2. Future

  • Future is a legally binding contract that obligates the parties to transact an asset at a predetermined date and price. Here, the buyer must purchase or seller must sell the underlying asset at the set price, regardless of the current market price. 
  • Future and forward are almost similar. But forward distinguishes itself from a future as it is traded between two parties directly without using an exchange.

3. Option

  • If a person buys an option, it grants him the right but not the obligation to buy or sell an underlying asset at a set price.

4. Swap

  • Swap refers to exchanging one financial instrument for another between the transacting parties concerned at a predetermined time.

Crony Capitalism

Crony Capitalism

This article deals with ‘Crony Capitalism.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .

What is Crony Capitalism?

Crony Capitalism is an economic system in which businessmen thrives not by their hardwork or risk taking capacity but through a nexus between a business class and the political class.

Examples of Crony-Capitalism


  • After close election victories, contractors affiliated to the winning politician are more likely to be awarded road projects. Around 26% of the roads listed as completed in Pradhan Mantri Gram Sadak Yojana were missing from 2011 Census Data, suggesting they were never actually built


  • Public Sector Bank was more likely to approve loan application of a company if owner gave election donation to the ruling party.


  • Political connections play a role in the allocation of bank loans to Chinese firms.

Why Crony Capitalism is bad ?

  1. Pro-Crony Policies leads to wealth destruction :
    • On one hand , Liberalization of Indian economy enabled creative destruction of inefficient companies by empowering markets. Creative destruction in turn enables wealth creation by allowing entry of new firms leading to increased competition and lowered prices for consumers.
    • But on other hand, Pro-Crony policies of government leads to wealth destruction as  cronyism fosters inefficiencies by  inhibiting the process of creative destruction.
  2. Cronyism leads to rent seeking behavior
    • In crony-capitalism, customer is the ultimate loser as  bribes paid by the industrialists are extracted from the customers .
  3. Crony Capitalism leads to Discretionary Allocation of Natural Resources
    • This can be shown using example of coal. Prior to 1993, no specific criteria for allocation of captive mines existed. Allocation was done via Committee in which committee used to decide allocation to private firms. Firms that got the free resource diverted efforts towards the tunneling of the windfall gain instead of towards productive business activity.  Currently, the coal mines allocation is governed by Coal Mines (Special Provisions) Act, 2015 which ensures that any future allocation of coal blocks would solely be through competitive auctions
  4. Crony Capitalism leads to Willful Defaults
    • RBI defines a willful defaulter as a firm that has defaulted in meeting its repayment obligations even though it has the capacity to honour these obligations. Due to Crony Capitalism, Willful Defaulters are not given strict treatment . Such incidents have destroyed total of Rs 1.4 lakh crore from bank’s assets.

Type of Economic Systems

Type of Economic Systems

This article deals with ‘Type of Economic Systems.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .


  • Economic System refers to the manner in which individuals and institutions are connected together to carry out economic activities in a particular area.
  • There are three major types of economic systems. They are:
    1. Capitalistic Economy (Capitalism)
    2. Socialistic Economy (Socialism)
    3. Mixed Economy (Mixedism)
Type of Economic Systems

1 . Capitalistic Economy

  • Capitalistic Economy is also termed as a free economy (Laissez faire, in Latin) or market economy where the role of the government is minimum and market determines the economic activities.
  • Adam Smith is the ‘Father of Capitalism’.

Main features of Capitalistic economy are

  1. The means of production  are privately owned.
  2. Golden rule for a producer under capitalism is ‘to maximize profit.’
  3. There is free competition as  government or any authority cannot prevent firms from buying or selling in the market.
  4. Freedom of Choice and Enterprise i.e. each individual is free to carry out any occupation or trade and produce any commodity. Similarly, consumers are free to buy any commodity as per their choice.
  5. Capitalist society is divided into two classes – ‘haves’ that is those who own property and ‘have-nots’ who do not own property and work for their living. The outcome of this situation is that the rich become richer and poor become poorer.

Merits of Capitalistic Economy

  1. Automatic Working: Without any government intervention, the economy works automatically.
  2. Efficient Use of Resources: All resources are put into optimum use.
  3. Incentives for Hard work: Hard work is encouraged and entrepreneurs get more profit for more efficiency.
  4. Production and productivity levels are very high .
  5. Consumers Sovereignty: All production activities are aimed at satisfying the consumers.
  6. Development of New Technology: As profit is the main motive, producers invest on new and efficient technology

Demerits of Capitalistic Economy

  1. Concentration of Wealth and Income in a few hands and thereby increases inequalities of income.
  2. Frequent recessions after certain period of time leading to hardship for the people.
  3. Wastage of Resources: Large amount of resources are wasted on competitive advertising and duplication of products .
  4. Class Struggle: Capitalism leads to class struggle as it divides the society into capitalists and workers .
  5. Even the harmful goods are produced if there is possibility to make profit.

2 . Socialistic Economy

  • Socialistic economy is also known as ‘Planned Economy’ or ‘Command Economy’.
  • Karl Marx is known as the ‘Father of Socialism’.

Main features of Capitalistic economy are

  1. The  Means of Production are owned by the government.
  2. Planning is an integral part of a socialistic economy and all decisions are undertaken by the central planning authority.
  3. Social welfare is the guiding principle behind all economic activities.
  4. There is absence of competition in the market. The state has full control over production and distribution of goods and services.
  5. Equality of Income as under socialism private property and the law of inheritance do not exist.
  6. Socialism provides equal opportunity for all through free health, education and professional training.
  7. There is a classless society and so no class conflicts.

Merits of Socialistic Economy

  1. Reduction in Inequalities: No one is allowed to own and use private property to exploit others.
  2. Allocation of Resources as central planning authority decides allocation of resources.
  3. Absence of Class Conflicts.
  4. Economic fluctuations can be avoided in Socialistic Economy.

Demerits of Socialist Economy

  1. Red Tapism and Bureaucratic lethargy impacts the output of economy.
  2. System does not provide any incentive for efficiency.
  3. Consumers do not enjoy freedom of choice over the consumption of goods and services.
  4. Concentration of Power in the hands of State.

3 . Mixed Economy

  • In a mixed economy system both private and public sectors co-exist and work together towards economic development.
  • It is a combination of both capitalism and socialism and tends to eliminate the evils of both capitalism and socialism.
  • Examples of Mixed Economy includes India, England, France and Brazil.
Mixed Economy

Features of Mixed Economy

  1. Means of production and properties are owned by both private and public.
  2. In mixed economies, both private and public sectors coexist. Private industries undertake activities primarily for profit. Public sector firms are owned by the government with a view to maximize social welfare
  3. Basic problems of what to produce, how to produce, for whom to produce and how to distribute are solved through the price mechanism as well as state intervention .
  4. Though private has freedom to own resources, produce goods and services and distribute the same, the overall control on the economic activities rests with the government.

Merits of Mixed Economy

  1. It promotes rapid economic growth as public requirements and private needs are taken care of.
  2. Economic Equality: The government uses progressive rates of taxation for levying income tax to bring about economic equality.
  3. Government safeguards the interest of the workers and weaker sections by legislating on minimum wages, and rationing, establishing fair price shops and formulating social welfare measures.

Demerits of Mixed Economy

  1. Lack of coordination between public sector and private sector as both work with divergent motives.
  2. Most of the public sector enterprises in Mixed Economy remain inefficient due to lethargic bureaucracy and red-tapism .
  3. The fear of nationalization discourages the private entrepreneurs in their business operations and innovative initiatives.
  4. Inequalities are present as  Ownership of resources, laws of inheritance and profit motive of people widens the gap between rich and poor.

Hence,  inequality of capitalism and inefficiency of socialism are found in mixed economies.


Last Updated: June 2023 (Inflation)


This article deals with ‘Inflation.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


  • Inflation can be defined as the persistent rise in the general level of prices of goods and services in an economy over a period of time
  • If the price of one good has gone up, it is not Inflation; it is Inflation only if the prices of most goods have gone up. 

Why does Inflation occur?


1. Demand-pull  Inflation

  • In his book “General Theory on employment, interest, money”, British Economist J.M. Keynes (1883) said, “when the economy is functioning at full employment, aggregate supply will match aggregate demand.” The economy will have a ‘General Price’ level at this equilibrium. 
  • Demand-pull Inflation happens when aggregate demand exceeds aggregate supply.   
  • It can happen (i.e. demand can exceed supply) in the following situations 
    1. Increase in money supply due to RBI’s expansionary or easy money policy.
    2. Increase in the propensity to consume.
    3. Increase in investment expenditure.
    4. Increase in the fiscal deficit of the governments.
    5. Increase in net exports.
  • To tackle such Inflation, the government can
    1. Reduce money supply by increasing interest on loans. 
    2. Induce people to save rather than consume by giving attractive investment options.
    3. Follow Fiscal Consolidation and keep fiscal deficit in check.
    4. Import goods in short supply.

2. Cost-push Inflation

  • It is also known as supply shock inflation. 
  • When supply is reduced due to an increase in the price of raw materials, leading to a higher cost of production. 

3. Profit-push Inflation

  • When Cartels, Monopolists, or Oligopolists deliberately cut their supply or hoard their produce or hike the price in greed of more profit.
  • E.g., OPEC increases the price of Petroleum or greedy Indian Merchant hoard onion so that their price increases. 

4. Structural Inflation

  • It is caused by deficiencies in certain conditions in the economy when it cannot respond to people’s increased demand for certain specific things or a lack of infra to make commodities available to consumers.

5. Repressed Inflation

  • During wars or natural disasters, governments impose price controls and rationing measures to keep prices in check. But after the controls are withdrawn at the end of war or disaster, prices will rise rapidly as traders try to cover up their earlier losses, leading to inflation. 

6. Other causes

  • The depreciation of Rupees makes the import of goods expensive.

Post Covid-19 Case Study

After the Covid-19 pandemic, high inflation was observed because 

  • Demand-push inflation was observed as most countries were following easy money policy and providing loans at low rates.
  • Repressed inflation was observed due to the pent-up demand of the customers.
  • Cost-push inflation was observed due to an increase in the price of raw materials owing to supply chain disruptions. 
  • Profit-push inflation was observed in petroleum products because OPEC+ didn’t increase the supply of crude oil commensurate with the increase in demand.

Types of Inflation based on speed

Types of Inflation based on speed

1. Creeping Inflation

  • Inflation of up to 4% (for the Indian economy).
  • It is regarded as safe and essential for job creation and economic growth.

2 . Walking

  • Inflation of more than 4% but limited to single-digit only.

3 . Galloping Inflation

  • Very high inflation in the range of double-digit or triple-digits.
  • Examples : 
    1. In the 1970s and 1980s, Latin American countries such as Argentina, Chile and Brazil faced Galloping Inflation in the range of 50 to 700 per cent. 
    2. After the disintegration of the ex-USSR in the early 1990s, the Russian economy faced such inflation.

4 . Hyperinflation Inflation

  • In Hyperinflation, annual inflation rates are in the million or even trillion. Prices of goods shoot up overnight.
  • Examples
    1. Germany during Great Depression when Deutsche Mark became worthless. 
    2. In recent times, Zimbabwe and Venezuela faced Hyperinflation.

Some definitions

1. Deflation

  • Persistent fall in the level of prices of goods and services.

2. Disinflation

  • Reduction in rate of inflation.

3. Stagflation

  • Stagflation is the combination of inflation & unemployment due to recession. 
  • Stagflation is the economic construct developed post the first oil shock of the early seventies when US inflation had soared to 11.5 per cent, even as the unemployment rate spiked to 9 per cent.

4. Reflation

  • Attempt to raise the price to counteract deflationary pressures.

5. Skewflation

  • Episodic price rises in one or a small group of commodities while inflation in the remaining goods and services remains the same.
  • E.g., the episodic rise in the price of onions, tomatoes, or pulses. 

Impacts of Inflation

Inflation hurts the following groups

Inflation hurts following groups
  • People on a fixed income, pensioners and bondholders suffer because their income remains fixed while money’s purchasing power is reduced due to inflation.
  • Consumers suffer because a price rise means more money being paid by consumers for what they buy. 
  • Lenders suffer because the money they will get back will have less purchasing power. (Note – Inflation favours the Debtors over the Lenders).
  • Importers suffer because inflation leads to currency depreciation, increasing the cost of imports. 
  • Taxpayers suffer as they have to pay more direct and indirect taxes. As indirect taxes are imposed ad valorem (on value), increased prices of goods make taxpayers pay increased indirect taxes. Similarly, the direct tax increases due to inflation as the taxpayer’s gross income moves to the upward slabs of tax brackets.

Additionally, Inflation has the following negative impacts

  • Reduction in overall demand: Due to a decrease in the purchasing power of people, the overall demand in the economy decreases. 
  • Wage-Inflation Spiral: Persistent inflation impacts the psychology of people who, in turn, demand higher wages. It starts the Wage-Inflation spiral. The companies further increase the price as the cost of their operations increases due to higher wages. 
Wage-Inflation Spiral

Inflation benefits the following groups

Inflation benefits following groups
  • Businessmen make huge profits because the final product price rises faster than the price of raw materials.
  • Borrowers benefit as they have to return the same money, but it has less purchasing power. 
  • Government is the biggest beneficiary as it is the biggest borrower. Due to inflation, they have to pay back lesser in real terms.
  • Exporters benefit because the depreciation of currency leads to cheaper exports. 

Is inflation good or bad?

Controlled inflation (between 2 to 6% for India) is desirable & good for the economy. This is because producers & traders make reasonable profits encouraging them to invest. But inflation above safe levels, i.e. 6% for India, hurt the economy negatively.

Philip’s Curve

  • It is a graphic curve showing a relationship between inflation and unemployment
  • Economist William Philips said there is a ‘trade-off’ between inflation and unemployment.
    • When inflation increases correspondingly, unemployment decreases  (because firms, enticed by higher prices, try to ramp up production by recruiting more people.)
    • When inflation decreases, unemployment increases. 
Philip's Curve
  • This idea became popular in the early 1960s when economists started to argue that unemployment could be checked forever at the cost of slightly higher inflation. Central Banks around the world began to make monetary policies accordingly. 
  • But in the 1970s, this idea was challenged because countries that followed the above policies suffered high inflation as well as unemployment in the long run. American economists Milton Friedman and Edmund Phelps argued that the trade-off between inflation and unemployment was only short-term. Once people expect higher inflation, they start to demand higher wages, and thus unemployment will rise back to its ‘natural rate’.

Index Theory

  • Inflation means a general rise in the price of goods and services. But rise against what? There should be some Base Year for that against which increases in prices of goods and services are measured. 
Index Theory of Inflation
  • The relative importance of all the goods and services is not the same. We cant equate rice and onion with shoes. Shoes are bought occasionally, but eatables are bought frequently, and their price rise hurts more. Hence, weight has to be assigned to all goods and services according to their relative importance. 
  • Hence, the Laspeyres formula is used to calculate WPI, CPI and IIP index, which is a weighted arithmetic mean of a basket of commodities that tracks price/production level against the base year.
Laspeyres formula  in calculating Inflation
  • The inflation rate is calculated using a change in Laspeyres Index in a particular month of the year compared to that of the same month of the previous year.
 Laspeyres Index in INflation

Base Years

Base Years for different Indexes are different

  Base Year Who
CPI 2012 NSO (under MoSPI)
WPI 2011 Economic Advisor, DPIIT
IIP 2011  NSO
Side Note: GDP 2011 NSO

Index 1: Consumer Price Index (CPI)

  • CPI measures inflation using the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
  • There are different types of CPIs released by various agencies, as given below.
  Released by Base Year
(1) Rural 2) Urban 3) All India)
NSO 2012
Consumer Food Price Index (CFPI) NSO 2012
CPI (Industrial Worker) Labour Ministry 2016
CPI (Agricultural Labourer) Labour Ministry 1986
CPI (Rural Labourer) Labour Ministry 1986

CPI (All India)

  • CPI (All India) is released by NSO with the base year of 2012.
  • It is the headline CPI inflation of India. 
  • Monetary Policy Committee uses CPI (All India) under its Inflation Targeting Mechanism.

CPI (Rural) and CPI (Urban)

  • Since the basket of goods used by people living in rural and urban areas differ, NSO also releases CPI (Rural) and CPI (Urban) to show the inflation in these areas separately.
  • These are also released by NSO, with 2012 as the base year. But, weightage assigned to different goods varies in accordance with the relative importance of goods used in these areas.

Basket of Goods and Weightage assigned

Component CPI (All India) weight CPI (Rural) weight CPI (Urban) weight
Food and beverages 45.86 34.18 36.29
Pan, tobacco and intoxicants 2.35 3.26 1.36
Clothing and Footwear 6.53 7.36 5.57
Housing 10.07  —- 21.67
Fuel and Light 6.84 7.94 5.50
Miscellaneous 28.32 27.26 29.53
Total 100 100 100

Consumer Food Price Index (CFPI)

  • If only the Food Component is seen, we get Consumer Food Price Index (CFPI).

Core Inflation

  • CPI minus Food and Fuel component is called Core Inflation.

Trends in CPI in recent times

Trends in CPI in recent times

CPI Old Indexes

1 . CPI-IW

  • It is Consumer Price Index for Industrial Workers
  • It is compiled by the Ministry of Labour
  • The base year of CPI (IW) is 2016. 
  • The basket of goods includes 370 goods. 
  • Use: It is used as the cost of living index in the organized sector. Dearness Allowance (DA) is calculated using this.

2 . CPI-AL

  • It is Consumer Price Index for Agricultural Labourers.
  • It is compiled by the Ministry of Labour
  • The base year of CPI (AL) is 1986 (the plan is to change it to 2019). 
  • The basket of goods includes 60 goods. 
  • Use: MNREGA wages are indexed to this.

3 . CPI – RL

  • It is Consumer Price Index for Rural labourers.
  • It is compiled by the Ministry of Labour
  • The base year of CPI (AL) is 1986 (the plan is to change it to 2019). 

Side Topic: Price Stabilization Fund

  • The government started the Price Stabilization Fund with a corpus of ₹500 Crore in 2015 to fight Food Inflation.
  • Under this, Union gives interest-free advances to states to buy onion, potatoes, pulses etc., from farmers and maintain their supply in urban areas to stabilize prices. 

Thalinomics: Economics of a plate of food in India

  • Thalinomics refers to the economics of a plate of food in India.
  • According to Economic Survey (2020), the price of Thali has reduced across all regions for both vegetarian and non-vegetarian thalis from 2015 to 2018. Hence, Thali’s affordability has increased for low-income families. The average yearly gain to the household of 5 individuals due to reduced prices is around Rs. 11,000.
  • The affordability of Thalis vis-à-vis a day’s worker’s pay has improved over time, indicating improved welfare of the ordinary person.
  • The decrease in the price is due to various reform measures taken in 2015 and afterwards, such as Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA), Pradhan Mantri Krishi Sinchai Yojana (PMKSY), Pradhan Mantri Fasal Bima Yojana (PMFBY), Soil Health Card, e-NAM, National Food Security Mission (NFSM) and National Food Security Act (NFSA).

Index 2: Wholesale Price Index

  • The wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. It reflects changes in the average prices of goods at the wholesale level — commodities sold in bulk and traded between businesses or entities rather than goods bought by consumers. 
  • It is released by Economic Advisor to the Department for Promotion of Industry and Internal Trade (DPIIT) under the Commerce Ministry. 
  • In 2017, the Base year was changed to 2011 (earlier was 2004). 
  • The basket of goods and the weight assigned to them while calculating WPI is as follows 
Component Weightage
Manufactured Products 64.23
Primary Articles 22.62
Fuel and Power 13.15
  • Earlier, indirect taxes were also counted in price while calculating the price. Other countries ignore indirect tax and transportation while measuring Producers Price Index (PPI). But in India, by including Indirect Taxes, we get inflation wrt wholesale buyers and not producers. In 2017, India fixed this anomaly, and now, while calculating WPI, the price without indirect tax is taken into consideration (although the Cost of Transportation is still there).

CPI-WPI Divergence and Convergence

It can happen due to the following reasons

  1. The changes in international prices pass on to Wholesale Prices (reflected in WPI) quickly but impact the retail prices (reflected in CPI) with a lag. Hence, there can be a wedge between both indices. 
  2. Secondly, the composition and weight assigned to different commodities differ in both indices.
CPI-WPI Divergence and Convergence

Index 3: Index of Industrial Production (IIP)

  • IIP is a monthly index prepared by NSO that tracks manufacturing activity in different sectors of an economy.
  • Its Base Year is 2011.
  • Various components and the weight assigned to them are as follows 
Manufacturing 78%
Mining 14%
Electricity 8%
  • Another way in which IIP is categorised is USE BASED CATEGORISATION. Weightage given to different categories in this is as follows
Primary goods 34.22%
Intermediate goods 17.22%
Capital goods 8.22%
Infrastructure goods 12.34%
Consumer durables 12.84%
Consumer nondurables 15.33%

Index of 8 Core Industries

  • Within IIP, 8 industries are considered core industries because they impact all other economic activities.
  • Eight Core Industries comprise 40.27 % of the weight of items included in the IIP.
  • It comprises eight industries as follows  
    • Coal (weight: 10.33%) 
    • Crude Oil (weight: 8.98 %)
    • Cement (weight: 5.37%) 
    • Fertilizer (weight: 2.63 %)
    • Electricity (weight: 19.85%), 
    • Refinery Products (weight: 28.04%)
    • Natural Gas (weight: 6.88 %) 
    • Steel (weight: 17.92%)

Causes of Inflation in recent period

  • Global Spillover of Inflation: Advanced Economies followed expansionary monetary and fiscal policies during Covid to increase liquidity in the economy, leading to inflation in Advanced economies. In the globalized world, inflation has been exported to India as well. 
  • Geopolitical Conflicts: The price of crude oil, natural gas and wheat has soared globally due to conflicts such as the Russia-Ukraine war. 
  • Fed Tapering: To deal with the high inflation, the Central Bank of the USA and other advanced economies have started hiking the interest rates rapidly. This has led to the flow of capital from Emerging Economies to the US, strengthening the dollar. The strong dollar has made imports expensive, leading to inflation.
  • Vagaries of Weather:  Unseasonal rains and excessive heat have impacted the yield of agricultural produce in India, leading to food inflation. 
  • Pent-up Demand: The demand which was suppressed during Covid has rebounded with power increasing the price of goods and services. E.g., housing, travel and tourism etc.

Other Indexes

1. Producer Price Index

  • It measures the prices of goods and services as they are sold to the wholesaler by producers.
  • It is measured from the perspective of the producer, while WPI is measured from the perspective of the wholesaler.  
  • It covers both goods and services. (WPI only covers goods)
  • It is a better indicator than CPI because CPI includes subsidies provided by the government. Hence, it doesn’t give a clear trajectory of prices of factors of production. 
  • Abhijit Sen Committee has recommended the introduction of PPI in India.

2. Service Performance  Indices

  • Any of the above indexes do not implicitly measure inflation of the service sector.
  • Chandrasekhar Committee suggested starting Service Performance Indices. As a result, the following indices have been started
Railways SPIs Measures Inflation in freight and passenger services
Banking SPIs Measures Inflation in services for which banks charge fees, commissions, brokerage, etc.
Postal SPIs Measures Inflation in services provided by  Department of Posts  (private postal services are not taken in account)
Telecom SPIs Inflation in cellular services on the basis of TRAI report.

3. Residex

  • Residex is released by the National Housing Bank (NHB).
  • It has 2017-18 as its base, and data is released on a quarterly basis.
  • It measures inflation in Housing prices in 26 cities.

4. Baltic Dry Index

  • Baltic Dry Index is released by London Stock Exchange.
  • It measures the cost of transporting raw materials by sea.
  • Conclusions that can be drawn from it are
    • Increase = World Economy will grow.
    • Decrease = World Economy will slowdown.