Cheque Truncation System

Cheque Truncation System(CTS)

It is one of the major innovations in cheque clearing after the Magnetic Ink Character Recognition (MICR) cheques introduced in the 80s. Cheque truncation is a system between clearing and settlement of cheques based on electronic images.

 

This form of clearing does not involve any physical exchange of instrument. Bank customers would get their cheques realised faster as local cheques are cleared almost the same day as the cheque is presented to the clearing house, while intercity clearing happens the next day. Besides speedy clearing of cheques, banks also have additional advantage of reduced reconciliation and clearing frauds. It is also possible for banks to offer innovative products and services based on CTS.

Why is it needed:

 

Though MICR technology helped improve efficiency in cheque handling, clearing is not very speedy as cheques have to be physically transported all the way from the collecting branch of a bank to the drawee bank branch. The CTS is more advanced and more secure. Many countries have sought to address this issue with cheque truncation, in which the movement of the physical instruments is curtailed at a point in the clearing cycle, beyond which the process is completed, purely based only on the electronic data and images of the cheques.

 

What has been the international experience in this regard:

 

Denmark and Belgium are pioneers in CTS. They adopted complete cheque truncation system more than two decades ago. Sweden is the typical example for having achieved complete truncation where all the cheques can be presented and encashed at any branch; irrespective of the bank on which they are drawn. CTS also takes care of the needs of future electronic transactions.

What has RBI and banks done:

RBI has already enabled CTS to be fully functional in New Delhi. Soon even cheque clearing in Chennai will be settled through CTS. Banks have also taken steps to introduce appropriate technology to facilitate this system.

 

What are the salient features of CTS?

 

The physical cheque is truncated within the presenting bank itself. Settlement is generated on the basis of current MICR code line data. These images will be archived electronically and be preserved for eight years. A centralised agency per clearing location will act as an image warehouse for the banks.

 

 

Taxation system in India

                    India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.

Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.

In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India.

Since April 01, 2005, most of the State Governments in India have replaced sales tax with VAT.


Taxes Levied by Central Government

Direct Taxes ::-

Tax on Corporate Income
Capital Gains Tax
Personal Income Tax
Tax Incentives
Double Taxation Avoidance Treaty

Indirect Taxes ::-
 

Excise Duty
Customs Duty
Service Tax
Securities Transaction Tax

Taxes Levied by State Governments and Local Bodies ::-

Sales Tax/VAT
Other Taxes

Direct Taxes ::-

Taxes on Corporate Income :

Companies residents in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act. Non-resident corporations are essentially taxed on the income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and management is situated entirely in India.

Domestic corporations are subject to tax at a basic rate of 35% and a 2.5% surcharge. Foreign corporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an education cess at the rate of 2% on the tax payable is also charged. Corporates are subject to wealth tax at the rate of 1%, if the net wealth exceeds Rs.1.5 mn ( appox. $ 33333).

Domestic corporations have to pay dividend distribution tax at the rate of 12.5%, however, such dividends received are exempt in the hands of recipients.

Corporations also have to pay for Minimum Alternative Tax at 7.5% (plus surcharge and education cess) of book profit as tax, if the tax payable as per regular tax provisions is less than 7.5% of its book profits.

Following measures were taken in the union budget 2007-08

Surcharge on income tax on all firms and companies with a taxable income
of Rs.1 crore or less to be removed.

A five year income tax holiday for two, three or four star hotels and for convention centres with a seating capacity of not less than 3,000; they should be completed and begin operations in National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during April 1, 2007 to March 31, 2010.

Concession under section 35(2AB) to be extended for five more years until March 31, 2012.

Tax holiday to undertakings in Jammu & Kashmir to be extended for another five years up to March 31, 2012.

Minimum Alternate Tax (MAT) to be extended to income in respect of which deduction is claimed under sections 10A and 10B; deduction under section 36(1) (viii) to be restricted to 20% of profits each year.

Rate of dividend distribution tax to be raised from 12.5% to 15% on dividends distributed by companies; and to 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors.

Expenditure on free samples and on displays to be excluded from the scope of Fringe Benefit Tax (FBT); ESOPs to be brought under FBT.

An additional cess of 1% on all taxes to be levied to fund secondary education and higher education and the expansion of capacity by 54% for reservation for socially and educationally backward classes.

Tax is payable on capital gains on sale of assets.

Long-term Capital Gains Tax is charged if
• Capital assets are held for more than three years and
• In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.

Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds are exempt from tax.

Short-term capital gains are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a rate of 10%.

Long-term and short-term capital losses are allowed to be carried forward for eight consecutive years. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.

Personal Income tax

Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act. The rates for personal income tax are as follows:-

Income range (Rupee) Tax Rate (%)

0-100,000 Nil
1,00,000-1,50,000 10
1,50,000-2,50,000 20
2,50,000 and above 30

Surcharges of 10% on total tax is levied if income exceeds Rs. 8,50,000

Recent budget initiatives in this regard are as follows:

Threshold limit of exemption in the case of all assessees to be increased by Rs.10,000 thus giving every assessee a relief of Rs.1,000; in the case of a woman assessee, threshold limit to be increased from Rs.135,000 to Rs.145,000 and in case of a senior citizen from Rs.185,000 to Rs.195,000 giving him or her a relief of Rs.2,000; deduction in respect of medical insurance premium under section 80D to be increased to a maximum of Rs.15,000 and, in case of a senior citizen, a maximum of Rs.20,000.

Rates of Withholding Tax

Current rates for withholding tax for payment to non-residents are:-

(i) Interest 20%
(ii) Dividends Dividends paid by domestic companies: Nil
(iii) Royalties 10%
(iv) Technical Services 10%
(v) Any other services Individuals: 30% of the income
Companies: 40% of the net income

The above rates are general and are applicable in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).

Tax Incentives

Government of India provides tax incentives for:-
• Corporate profit
• Accelerated depreciation allowance
• Deductibility of certain expenses subject to certain conditions.

These tax incentives are, subject to specified conditions, available for new investment in
• Infrastructure,
• Power distribution,
• Certain telecom services,
• Undertakings developing or operating industrial parks or special economic zones,
• Production or refining of mineral oil,
• Companies carrying on R&D,
• Developing housing projects,
• Undertakings in certain hill states,
• Handling of food grains,
• Food processing,
• Rural hospitals etc.

 

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Overview of Indian Financial System

 

                        Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. This paper discusses the meaning of finance and Indian Financial System and focus on the financial markets, financial intermediaries and financial instruments. The brief review on various money market instruments are also covered in this study. 

The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read about Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government. Here some of the definitions of the word 'finance', both as a source and as an activity i.e. as a noun and a verb.

 

The American Heritage® Dictionary of the English Language, Fourth Edition defines the term as under-

 

1:"The science of the management of money and other assets.";
 

2: "The management of money, banking, investments, and credit. ";
 

3: "finances Monetary resources; funds, especially those of a government or corporate body"
 

4: "The supplying of funds or capital."

Finance as a function (i.e. verb) is defined by the same dictionary as under-
 

1:"To provide or raise the funds or capital for": financed a new car
 

2: "To supply funds to": financing a daughter through law school.
 

3: "To furnish credit to".
 

Another English Dictionary, "WordNet ® 1.6, © 1997Princeton University " defines the term as under-
 

1:"the commercial activity of providing funds and capital"
 

2: "the branch of economics that studies the management of money and other assets"
 

3: "the management of money and credit and banking and investments"
 

The same dictionary also defines the term as a function in similar words as under-
 

1: "obtain or provide money for;" " Can we finance the addition to our home?"
 

2:"sell or provide on credit "
 

All definitions listed above refer to finance as a source of funding an activity. In this respect providing or securing finance by itself is a distinct activity or function, which results in Financial Management, Financial Services and Financial Institutions. Finance therefore represents the resources by way funds needed for a particular activity. We thus speak of 'finance' only in relation to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also referred to as "Funds" or "Capital", when referring to the financial needs of a corporate body. When we study finance as a subject for generalising its profile and attributes, we distinguish between 'personal finance" and "corporate finance" i.e. resources needed personally by an individual for his family and individual needs and resources needed by a business organization to carry on its functions intended for the achievement of its corporate goals.

 

INDIAN FINANCIAL SYSTEM

 

 The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector.  While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.
There are areas or people with surplus funds and there are those with a deficit.  A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit.  A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

 

Financial System;

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy.  The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below;

 

FINANCIAL MARKETS

 

A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

 

Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument.  Funds are available in this market for periods ranging from a single day up to a year.  This market is dominated mostly by government, banks and financial institutions.

 

Capital Market -  The capital market is designed to finance the long-term investments.  The transactions taking place in this market will be for periods over a year.

 

Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies.  Depending on the exchange rate that is applicable, the transfer of funds takes place in this market.  This is one of the most developed and integrated market across the globe.

 

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.
   

Constituents of a Financial System

 

FINANCIAL INTERMEDIATION

 

Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount.  When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice.  Adequate information of the issue, issuer and the security should be passed on to take place.  There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, Financial intermediaries came into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower.  This service was offered by banks, FIs, brokers, and dealers.  However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in move than one market e.g. underwriter.  However, the services offered by them vary from one market to another.

Intermediary	Market	Role
Stock Exchange	Capital Market	Secondary Market to securities
Investment Bankers	Capital Market, Credit Market	Corporate advisory services, Issue of securities
Underwriters	Capital Market, Money Market	Subscribe to unsubscribed portion of securities
Registrars, Depositories, Custodians	Capital Market	Issue securities to the investors on behalf of the company and handle share transfer activity
Primary Dealers Satellite Dealers	Money Market	Market making in government securities
Forex Dealers	Forex Market	Ensure exchange ink currencies

 

FINANCIAL INSTRUMENTS

 

Money Market Instruments

 

The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.

Some of the important money market instruments are briefly discussed below;

1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers

1. Call /Notice-Money Market

 

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

 

2. Inter-Bank Term Money

 

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

 

3. Treasury Bills.

 

Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.

 

4. Certificate of Deposits

 

Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

 

5. Commercial Paper

 

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

 

Capital Market Instruments

 

The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.

 

Hybrid Instruments

 

Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc.

 

 

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STOCK EXCHANGE,COMMODITY EXCHANGE RELATED TERMS

 

   Arbitration :-

        Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for resolving disputes between the trading members and their clients in respect of trades done on the exchange.

            Barcode Labelling :-

         A Barcode is a printed code that consists of a series of vertical bars, which vary in thickness. Barcodes are capable of being ‘read’ and decoded by barcode scanners. They are used in various industries as application tools. They are used to identify retail sales items, identification cards, library books and other products. They are also utilised to manage work in progress, to track documents and for many other automated identification applications.

            Basis Point (bps) :-

        One basis point is one-hundredth of a percentage point.

            Book Building :-

         A process used to ascertain and record the indicative subscription bids of interested investors to a planned issue of securities. The advantages of this technique of obtaining advance feedback, are that it results in optimal pricing and removes uncertainty regarding mobilisation of funds.

            Book Value :-

        Book value is the net worth that comprises of equity capital plus reserves and surplus minus accumulated losses divided by the number of shares outstanding as rendered in the latest annual report of a company. The book value of an equity share tends to increase as the ratio of reserves and surplus to the paid-up equity capital increases.

     Calendar Spread :-

       This is done between futures contracts. The investor buys the near month contract (ex. October gold) when prices rise or sell the positions in the near months and purchase the forward months contracts. This trading is popular in gold, soya, silver, crude, chana, urad, jeera and chilli.

            CDs :-

         A Certificate of Deposit (CD) is a negotiable promissory note issued by the banks and the Financial Institutions (FIs) with a maturity date of upto a year. It is secure in nature and issued at a discount to the face value (the redemption to investors takes place at the face value).  

            Collateralised Borrowings Lending Obligation (CBLO) :-

        Collateralised Borrowings Lending Obligation (CBLO) is a money market instrument for borrowing against the securities, held in custody by the Clearing Corporation of India Limited (CCIL) for the amount lent.

            Commodity Exchange :-

        Like stock exchanges in capital markets, a commodity exchange is an association or a company or any other body corporate that is organising futures trading in commodities. The new generation National-level exchanges have been set up in a corporatised/demutualised environment. There are three nationally recognised commodity exchanges in India and 22 regional exchanges. The National exchanges are Multi Commodities Exchange of India (MCX) in Mumbai, National Commodities and Derivatives Exchange of India (NCDEX) and National Multi Commodities Exchange (NMCE).       

           Commodity:

        A commodity is a product having commercial value that can be produced, bought, sold and consumed. It is normally in a basic raw unprocessed state. But products derived from primary sector and structured products are also traded at these exchanges. In India, the list includes previous metals, ferrous and non-ferrous metals, spices, pulses, plantation crops, sugar and other soft commodities.

 

            Trading done in the Commodity Exchanges:

        Like the stock market online trading system, commodity exchanges are also typically on the online trading system. It is an order-driven, transparent trading platform, which is reachable to the various participants through the Internet, VSAT and leased line modes operated by members or sub-brokers spread around country.

            Demutualisation :-

      It essentially means segregating the trading rights to member brokers from the ownership and management of the exchanges. It aims at curbing the clout of member-brokers in running the exchanges.

            Due Diligence :-

      An internal audit of a target firm by an acquiring firm. Offers are often made contingent upon resolution of the due dilengence process.

            Exchange Rate :-

        Just as the price of any asset, the exchange rates is the price at which you can buy that currency. If at any given rate, the demand for a currency is greater (lesser) than its supply, its price will r
ise (fall).

            What makes currency rates move ?

       The exchange rate reflects the strength of an economy in terms of its growth performance, balance of payments etc. as well as economic expectations that drive the ‘market sentiment’ and how much the market has reacted or ‘discounted’ the anticipated information.

            Are exchange rates entirely market-determined ?

        Under the current managed float regime, most currencies, including India, let their rates fluctuate according to market forces. But if a currency appears to be ‘overvalued’ or ‘undervalued’ by the market or if rate movements are significantly adversely affecting an economy’s macroeconomic performance, then Central banks intervene to depreciate (or appreciate) their currency. Exchange rates also move on expectations of change in regulations relating to exchange markets and official intervention. In India, the Reserve Bank’s basic philosophy is a flexible one, without any particular ‘target’ for the rupee’s rate. With a broad objective to avoid excessive volatility, facilitate growth of Indian exports and generate confidence among overseas investors.

                    Futures contract :-

      Futures contract is an agreement between two parties to buy or sell a specified quantity and defined quality of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract. This is typically traded at regulated commodity exchanges. 

            Futures and options :-

       A futures contract is an agreement between two parties to buy or sell an underlying asset at a certain time in the future at a certain price. It has a standardised date and month of delivery, quantity and price.

   An option gives the buyer the right but not the obligation to buy the underlying asset. A futures contract on the other hand is obligatory on both the buyer and the seller is a transaction between the buyer and seller to buy or sell an asset at an agreed price at a future date. This is a common feature of options trading in shares, stocks and commodities.

            Geographic Information Systems (GIS) :-

       The GIS are computer systems used to store and process geographic data. The GIS scores over other data management systems in its ability to present spatial relationships in a digital map form that is easy to visualise and understand. Data is the central resource of a GIS system. The GIS systems process two kinds of data-spatial and attribute. Spatial data gives the geographic location of a point of interest (e.g. railway station, school, bank branch, the ATM etc). Attribute data contains other characteristics of that point of interest.

 

            Hot Money :-

    Money that moves across country borders in response to interest rate differences and that moves away when the interest rate differential disappears.

            Independent Director :-

          An independent Director is a non-executive Director on the board of a company who has integrity, expertise and independence to balance the interests of the various stakeholders. The idea of having them is to bring objectivity to the board decisions and to protect general interests of the company, including that of the minority and the small shareholders. The independent Directors are expected to improve the corporate governance in a company.

            Who cannot be an independent Director in a listed company ?

        According to the SEBI, having a ‘pecuniary’ relationship with the company or its arms, other than receiving the Director’s remuneration, is a disqualification. The independent Director must not be related to the promoters or anyone in the senior management position from one level below the board. He should not have been an executive of the company or of its audit, consulting or legal firms in the past three financial years.

            Which listed entities are outside the scope of the revised Clause 49 ?

         The Clause will apply to the listed entities which are not companies but body corporates such as the private and the PSU banks, the Financial Institutions (FIs) and the insurance companies, only to the extent that it does not violate the laws governing them. Revised Clause 49 does not apply to mutual funds.

           

            Inter-exchange arbitrage :-

        This is popular among liquid commodities like gold and silver, where the arbitrage can take place between the Indian exchanges and the foreign exchanges, where contract specifications are similar.

            Interest Rate Swaps (IRS) :-

        Interest Rate Swaps (IRS) are Over-The-Counter (OTC) products that involve an exchange of cash flows between the two counter parties at pre-determined specifications wherein the fixed rate interest payments are exchanged for floating rate payments.

            Islamic Banking :-

        It is banking practiced as per the Islamic principles as prescribed in the ‘shariah’ known as ‘Fiqh al-Muamalat’ (Islamic rules on transaction). The Islamic law prohibits interest on both the loans and the deposits. Interest is also called ‘riba’ in Islamic discourse. The argument against interest is that money is not good and profit should be earned on goods and services only and not on control of money itself.

            What are the different products offered ?

        Investment finance is offered by these banks through ‘Musharka’, where a bank participates as a Joint Venture (JV) partner in a project and shares the profits and losses. Investment finance is also offered through ‘Mudabha’, where the banks contribute the finance and the client provides the expertise, management and labour and the profits are shared in a pre-arranged proportion, while the loss is borne by the bank.

            Where is it practised ?

        Islamic banks have come into being since the early 70s. There are nearly 30 Islamic banks all over the world, from Africa, Europe to Asia and Australia and are regulated even within the conventional banking system.

            Kaizen :-

        Kaizen comes from two words : Kai, which means ‘to change’ and zen, which means ‘good or for the better’. Together, the words mean continuous change for the better. It is not just a philosophy of the workplace, it also means continuously improving in every facet of life, including business, industry, commerce Government and diplomacy, among others. In full implementation, it becomes the foundation of all activities. Kaizen requires everyone in the organisation to be involved in the improvement process executives, management, supervisors and workers.

            Letter of Offer :-

         A Letter of Offer is a document addressed to the shareholders of the target company containing disclosures of the acquirer/Persons Acting in Concert (PACs), target company, their financials, justification of the offer price, the offer price, number of shares to be acquired from the public, purpose of acquisition, future plans of acquirer, if any, regarding the target company, change in control over the target company, if any, the procedure to be followed by acquirer in accepting the shares tendered by the shareholders and the period within which all the formalities pertaining to the offer will be completed. 

           

            Merchant Banker :-

        An intermediary who provides various financial services, other than lending money, such as managing public issues, underwriting new issues, arranging loan syndications and giving advice on portfolio management, financial restructuring, mergers and acquisitions.

            Mid-cap stock :-

         The name 'mid-cap' originates from the term medium capitalised. It is based on the market capitalisation of the stock. The National Stock Exchange (NSE) defines the mid-cap as stocks whose average six months' market capitalisation is between Rs.75 crore and Rs.750 crore. In the US, the midcap shares are those stocks that have a market capitalisation ranging from Rs.9,000 crore to Rs.45,000 crore. In India, these shares are classified as large-cap shares.

            MIFOR :-

       MIFOR is an interest rate derivative, which is calculated by adding dollar London Interbank Offered Rate (LIBOR) rates with the rupee-dollar forward premia. The MIFOR rate is hence, the borrowing cost from overseas. It is utilised to hedge against the movement of global interest rates. LIBOR is the term money benchmark for the Euro-dollar market.

            Net worth :-

       Net worth is the difference between the total assets and total liabilities.

            Participatory Notes (PNs) :-

       Participatory Notes (PNs) are a derivative instrument issued by the FIIs to their overseas clients, who are not registered with the Indian regulators.

            Plea Bargaining :-

         Plea Bargaining is the import of principles of contract into criminal law.

 

            Penny Stocks :-

        Penny stocks is a term used to define cheaply available stocks of typically loss-making companies. Penny stock is used in the context of general equities. The stocks that typically sell for less than $1 share, although it may rise to as much as $10/share after the Initial Public Offering (IPO), usually because of heavy promotion.

            Podcasting :-

          A term based on the name of Apple’s portable media player, allows customers to download audio and now video segments for free, to their computers and portable devices.

            Profit Booking :-

        Selling shares when their prices have risen above their purchase price.

            Profit taking :-

        Selling commodities, securities etc. at a profit, either after a market rise or because they show a profit at current levels but will not do so if an expected fall in prices occurs.

           

            Settlement :-

         Settlement refers to the import of principles of contract into civil or administrative law.

            The Cash and Carry Arbitrage :-

        This is the easiest form of arbitrage, where the investor has to buy the commodity in the spot market and sell it in the futures market. This is largely successful in gold and silver and is also popular among various agricultural commodities.

            The Price Earning ratio (P/E ratio) :-

         The P/E ratio is the ratio between the Market Price of the Share (MPS) and the Earning Per Share (EPS). This ratio tells us how many times the market price of the shares is vis-à-vis its earning per share.

 

 

Banking and Financial Terms

Active Market

This is a term used by stock exchange which specifies the particular stock or share which deals in frequent and regular transactions. It helps the buyers to obtain reasonably large amounts at any time.

Administered Price

The administrative body e.g., the government a marketing board or a trading group determines this price. The competitive market force are not entitled to determine this price. The government fixes a price in accordance with demand supply portion in the market.

Ad-valorem Tax Ad-valorem tax is a kind of indirect tax in which goods are taxed by their values. In the case of ad-volorem tax, the tax amount is calculated as the proportion of the price of the goods. Value added Tax (VAT) is an ad-volorem Tax.

Advanced Countries

Advanced countries are countries which are industrially advanced, having high national and per capita income and ensure high rate of capital formation. These countries possess highly developed infrastructure and apply most updated and advanced technical know-how in their productive activities. A strong and well organised financial structure is found in these advanced countries.

Amalgamation

It means ‘merger’. As and when necessity arises two or more companies are merged into a large organisation. This merger takes place in order to effect economies, reduce competition and capture market. The old firms completely lose their identity when the merger takes place.

Appreciation

Appreciation means an increase in the value of something e.g., stock of raw materials or manufactured goods. It also includes an increase in the traded value of a currency. It is the antonym of Depreciation. When the prices rise due to inflation, appreciation may occur. It causes scarcity or increase in earning power.

Arbitrage

When a person performs functions of middle man and buys and sells goods at a particular time to cash the price differences of two markets, this action is termed as arbitrage. Purchases are made in the market where price is low and at the same time, goods are sold in other market where the price are high. Thus the middleman earns profit due to price difference in two markets.

Arbitration

Where there is an industrial dispute, the Arbitration comes to the force. The judgement is given by the Arbitrator. Both the parties have to accept and honour the Arbitration. Arbitration is the settlement of labour disputes that takes place between employer and the employees.

Auction

When a commodity is sold by auction, the bids are made by the buyers. Whose ever makes the highest bid, gets the commodity which is being sold. The buyers make the bid
taking into consideration the quality and quantity of the commodity.

Autarchy

If a country is self-sufficient, it does not require the imports for the country. Autarchy is an indicator of self-sufficiency. It means that the country itself can satisfy the needs of its population without making imports from other countries.

Automation

Automation means the use of machinery & technology to replace the labour’s work. Automation increases the demand of skilled workers. Unskilled and semiskilled workers are reduced as a result of automation.

Balanced Budget

When the total revenue of the government exactly equals the total expenditure incurred by the government, the budget becomes a balanced budget. But it is a conservative view point. In present days, the welfare government has to regulate a number of economic and social activities which increase the expenditure burden on the government and results in deficit budget.

Balance of Payment

Balance of payment of a country is a systematic record of all economic transactions completed between its residents and the residents of remaining world during a year. In other words, the balance of payment shows the relationship between the one country's total payment to all other countries and its total receipts from them. Balance of payment is a comprehensive term which includes both visible and invisible items. Balance of payment not only include visible export and imports but also invisible trade like shipping, banking, insurance, tourism, royalty, payments of interest on foreign debts.

Balance of Trade

Balance of trade refers to the total value of a country's export commodities and total value of imports commodities. Thus balance of trade includes only visible trade i.e., movement of goods (exports and imports of goods). Balance of trade is a part of Balance of payment statement.

Balance Sheet

Balance sheet is a statement showing the assets and liabilities of a business at a certain date. Balance sheet helps in estimating the real financial situation of a firm.

Bank

Bank is a financial institution. It accepts funds on current and deposit accounts. It also lends money. The bank pays the cheques drawn by customers against current and deposits accounts. The bank is a trader that deals in money and credit.

Bank Draft

Banker's draft is a negotiable claim drawn upon a bank. Drafts are as good as cash. The drafts cannot be returned and unpaid. Draft is issued when a customer shows his unwillingness to accept cheque in payment for his services or mercantile goods. Bank Draft is safer than a cheque.

Bank Rate

Bank Rate is the rate of discount at which the central bank of the country discounts first class bills. It is the rate of interest at which the central bank lends money to the lower banking institutions. Bank rate is a direct quantitative method of credit control in the economy.

Bilateralism

It implies an agreement between two countries to extend to each other specific privileges in their international trade which are not extended to others.

Birth Rate

Birth Rate (or Crude Birth Rate) is number of the births per thousand of the population during a period, usually a year. Only live births are included in the calculation of birth rate.

Black Money

It is unaccounted money which is concealed from tax authorities. All illegal economic activities are dealt with this black Money. Hawala market has deep roots with this black money. Black money creates parallel economy. It puts an adverse pressure on equitable distribution of wealth and income in the economy.

Blue Chip

It is concerned with such equity shares whose purchase is extremely safe. It is a safe investment. It does not involve any risk.

Blue Collar Jobs

These Jobs are concerned with factory. Persons who are unskilled and depend upon manual jobs that require physical strain on human muscle are said to be engaged in Blue Collar Jobs. In the age of machinery, such Jobs are on the decline these days.

Brain-Drain

It means the drift of intellectuals of a country to another country. Scientists, doctors and technology experts generally go to other prominent countries of the world to better their lot and earn huge sums of money. This Brain-Drain deprives a country of its genius and capabilities.

Bridge Loan

A loan made by a bank for a short period to make up for a temporary shortage of cash. On the part of borrower, mostly the companies for example, a business organization wants to install a new company with new equipments etc. while his present installed company / equipments etc. are not yet disposed off. Bridge loan covers this period between the buying the new and disposing of the old one.

Budget

It is a document containing a preliminary approved plan of public revenue and public expenditure. It is a statement of the estimated receipt and expenses during a fixed period, it is a comparative table giving the accounts of the receipts to be realized and of the expenses to be incurred.

Budget Deficit

Budget may take a shape of deficit when the public revenue falls short to public expenditure. Budget deficit is the difference between the estimated public expenditure and public revenue. The government meets this deficit by way of printing new currency or by borrowing.

Bull

Bull is that type of speculator who gains with the rise in prices of shares and stocks. He buys share or commodities in anticipation of rising prices and sells them later at a profit.

Bull Market

It is a market where the speculators buy shares or commodities in anticipation of rising prices. This market enables the speculators to resale such shares and make a profit.

Buoyancy

When the government fails to check inflation, it raises income tax and the corporate tax. Such a tax is called Buoyancy. It concerns with the revenue from taxation in the period of inflation.

Business Cycle

Business cycle (also known as trade cycle) are species of fluctuations in the economic activity of organised communities. It is composed of period of good trade characterised
by rising prices and low unemployment, alternating with period of bad trade characterised by falling prices and high unemployment. Every trade cycle have five different subphases–depression, recovery, full employment, prosperity (boom) and recession.

Call Money

Call money is in the form of loans and advances which are payable on demand or within the number of days specified for the purpose.

Capital Budgeting

Capital budgeting represents the process of preparing budget for a period of a year or even for several years allocating capital outlays for the various investment projects. In other words, it is the process of budgeting capital expenditure by means of an annual or longer period capital budget.

Capital-labour Ratio

Latest models of machinery and equipment raise the labour efficiency and the output is maximized. Capitallabour ratio is the amount of capital against the given labours that a firm employs. Capital-labour ratio is the ratio of capital to labour.

Capital Market

Capital market is the market which gives medium term and long term loans. It is different from money market which deals only in short term loans.

Capitalism

Capitalism is an economic system in which all means of production are owned by private individuals Selfprofit motive is the guiding feature for all the economic activates under capitalism. Under pure capitalism system economic conditions are regulated solely by free market forces. This system is based on ‘Laissez-faire system’ i.e., no state intervention. Sovereignty of consumer prevails in this system. Consumer behaves like a king under capitalism.

Cash Reserve Ratio (CRR)

The commercial banks are required to keep a certain amount of cash reserves at the central bank. This percentage amount is called CRR. It influences the commercial bank’s volume of credit because variation in CRR affects the liquidity position of the banks and hence their ability to lend.

Census

Census gives us estimates of population. Census is of great economic importance for the country. It tells us the rate at which the total population is increasing among different age groups. In India census is done after every 10 years. The latest census in India has been done in 2001.

Central Bank
Central Bank may be defined as the apex barking and monetary institution whose main function is to control, regulate and stabilize the banking and the monetary system of the country in the national interest.

Cheque

Cheque is an order in writing issued by the drawer to a bank. If the customer has sufficient amount in his account, the cheque is paid by the bank. Cheques are used in place of cash money.

Clearing Bank

Clearing bank is one which settles the debits and credits of the commercial banks. Even of the cash balances are lesser, clearing bank facilitates banking operation of the commercial bank.

Clearing House

Clearing house is an institution which helps to settle the mutual indebtedness that occurs among the members of its organisation.

Closed Economy

Closed economy refers to the economy having no foreign trade (i.e., export and import). Such economies depend exclusively on their own internal domestic resources and have
no dependence on outside world.

Collusion

Producers of an industry reduce competition among themselves to raise their profits. They fix the price themselves with a clear understanding in this regard. This understanding among different firms is called collusion.

Coinage

Art and practice of making coins is called coinage. The metal is melted and moulded to shape into a coin. The coinage is a medium of exchange (money).

Collectivism

Collectivism is a belief that nation's interest is superior to individual interest. This is the collective thinking of the society and polity national leaders and also communist opine the theory of collection.

Commercial Bank

Commercial Bank is an institution of finance. It deals with the banking services through its branches in whole of the country. Operation of current accounts, deposits, granting of loans to individuals and companies etc. are various functions of the commercial bank.

CommunismCommunism is a political and economic system in which the state makes the major economic decision State owns the bulk of capital assets. Responsibility for production and distribution lies with the state in this system.

Core SectorEconomy needs basic infrastructure for accelerating development. Development of infrastructure industries like cement, iron and steel, petroleum, heavy machinery etc. can only ensure the development of the economy as a whole. Such industries are core sector industries.

Corporation Tax

It is a tax on company's profit. It is a direct tax which is calculated on profits after interest payments and allowance (i.e., Capital allowance) have been deducted but before dividends are allowed for.

Cost-push InflationIt arises due to an increase in production cost. Such type of inflation is caused by three factors : (i) an increase in wages, (ii) an increase in the profit margin and (iii) imposition of heavy taxation.

Credit RationingCredit rationing takes place when the banks discriminates between the borrowers. Credit rationing empowers the bank to lend to some and to refuse to lend to others. In this way credit rationing restricts lending on the part of bank.

Credit SqueezeMonetary authorities restrict credit as and when required. This credit restriction is called credit squeeze. Monetary authorities adopt the policy of credit squeeze to control inflationary pressure in the economy.

Custom DutyCustom duty is a duty that is imposed on the products received from exporting nations of the world. It is also called protective duty as it protects the home industries.

Cyclical UnemploymentIt is that phase of unemployment which appears due to the occurrence of the downward phase of the trade cycle. Such an employment is reduced or eliminated when the business
cycle turns up again.

Dear Money

Dear money is that money which can only be borrowed at a high rate of interest. In dear money policy, bank rate and other rates of interest are high and as a result borrowing becomes expensive. Dear money policy is deliberate policy which is adopted by the monetary authorities to check inflation in the economy.

Death Duty

It is a direct tax which is imposed on the estate of deceased person. Death duty or Death Tax is a form of personal tax on property which is levied when property passes from one person to other at the time of death of the former.

Death Rate

Death rate signifies the number of deaths in a year per thousand of the population. It is mostly known as crude death rate. Life expectancy is important determinant of death rate.
A country having high life expectancy will have a high crude death rate.

DecentralisationDecentralisation means the establishment of various unit of the same industry at different places. Large scale organisation or industry can not be run at one particular place or territory. In order to increase the efficiency of the industry, various units at different places are located.

Debt Service (Total)

The sum of principal repayments and interest actually paid in foreign currency, goods and services on longterm debt (having maturity of more than one year), interest paid on shortterm debt and repayments to IMF.

Deficit Financing

It is a practice resorted to by modern government of spending more money than it receives in revenue. It is a policy of bridging a deficit between governments expenditure and revenue. Deliberately budgeting for a deficit is called deficit financing. This practice was popularised by Prof. J. M. Keynes to deal with the depression and unemployment situations and to stimulate economic activity. Deficit financing, though having inflationary effects, has now become a common practice in all countries.

Deflation

Deflation is the reverse case of inflation. Deflation is that state of falling prices which occurs at that time when the output of goods and services increases more rapidly than the volume of money in the economy. In the deflation the general price level falls and the value of money rises.

Devaluation

The loss of value of currency of a country relative to other foreign currency is known as devaluation. Devaluation is a process in which the government deliberately cheapens the exchange value of its own currency in terms of other currency by giving it a lower exchange value. Devaluation is used for improving, the balance of payment situation in the country.

Direct Tax

A tax is said to be a direct tax when it is not intended to be shifted to anybody else. The person who pays it in the first instance is also excepted to bear it. Thus the impact and incidence of direct tax fall on the same person shifting of direct tax is not possible Income Tax is a example of direct tax.

Disinflation

It refers to a process of bringing down prices moderately from their high level without any adverse impact on production and employment. Thus, disinflation is an anti-inflationary measure.

DissavingDissaving occurs when expenditure exceeds income. Raising of loans or utilization of past accumulated savings takes place in such eventuality.

Dividend

Dividend is the amount which the company distributes to shareholders when the profits of the company are calculated by the board of directors.

Economic Integration

Economic integration appears when two or more nations coordinate themselves and their economies are linked up. It may exhibit itself in the form of free trade area or a full economic union. EEC is an example of economic integration.

Engel's Law

This law was formulated by Ernst Engel. This law states that, with given taste and preference, the portion of income spend on food diminishes as income increases. According to this law, smaller a person's income, the greater the proportion of it that he will spend on food and vice versa.

Estate DutyIt is a tax which is levied on the estate of a decreased person. It is also known as death duty. The ownership of state changes hands only after the payments of the estate duty. It is an progressive tax in nature.

Excise Duty

It is a tax which is imposed on certain indigenous production (e.g., petroleum products, cigarettes etc.) of the country. Excise duty may be imposed either to raise revenue or to check the consumption of the commodities on which they are imposed. Excise duty is progressive in nature.

Face ValueIt refers to that normal value of coin at which the coin circulates and is accepted in the discharge of debit or obligation. Broadly speaking, the face value refers to domination stamped on a coin / or documents when it is issued. In securities, it refers to par value.

Fascism

It is a form of political system. In it every economic consideration rests on one criterion—the increase in the people's standard of living. It also lays emphasis on military
strength and prestige of the country. It is the extreme nationalism and the ultimate goal is self-sufficiency.

Federal EconomyIt refers to a federation which is an association of two and more states. A federal state is a union of state in which authority is divided between the federal (or central) government and the state governments. In a federal economy both the centre and the states are independent in the exercise of this authority.

Fiduciary IssueGenerally bank-note are backed by gold. But when they are not backed by gold and government securities replace gold, it is called fiduciary issue. Such fiduciary issue results in inflation.

Fertility Rate

The term fertility refers to the actual bearing of children or ‘occurrence of births’. Fertility rate measures the average number of the live births per 1000 women. This rate is one of the most important and useful aids to population projection. It helps in assessing population trends in the economy.

Fiscal PolicyFiscal policy is that part of government economic policy which deals with taxation, expenditure, borrowing, and the management of public debt in the economy. Fiscal policy primarily concerns itself with the flow of funds in the economy. Fiscal policy primarily concerns itself with the flow of funds in the economy. It exerts a very powerful influence on the working of economy as a whole.

GEM

GEM (Gender Empowerment Measure) is a composite index measuring gender inequality in three basic dimensions of empowerment–economic participation and decision making, political participation and decision making, and power over economic resources.

GDI

GDI (Gender Related Development Index) is a composite index measuring average achievement in the three basic dimensions captured in the human development index–a long and healthy life, knowledge and a decent standard of living–adjusted to account for inequalities between men and women.

Gini-coefficientIt represents the measurement of inequality derived from the ‘Lorenz Curve,’ with every increase in the degree of inequality, the curvature of the Lorenz Curve also increases and
the area between the curve and 45° line becomes larger.
The Gini-coefficient is measured as—
G =Area between Lorenz Curve & 45° Line/Area above the 45° Line

Giffin Goods

Giffin goods have the positive relationship between price and quantity demanded and as a result demand curve of Giffin goods slopes upward from left to right. This phenomenon was first observed by Sir Robert Giffin in relation to the demand for bread by poor labours.

Gresham's Law

“Bad money (if not limited in quantity) drives good money out of circulation”—This statement was given by Sir Thomas Gresham, the economic Adviser of Queen Elizabeth. This law states that people always want to hoard good money and spend bad money when two forms of money are in circulation at the same time.

Gross Domestic Product (GDP)It is the money value of all final goods and services produced within the geographical boundaries of the country during a given period of time (usually a year). GDP can be calculated both at current prices and at constant prices. If we add net factor income from abroad to the GDP, we get ‘Gross National Product’ (GNP).

Gross National Product (GNP)

It refers to the money value of total output or production of final goods and services produced by the nationals of a country during a given period of time, generally a year.

Gross National Product Deflator

It is a Price Index Number used to correct the money value of Gross National Product (GNP) for price changes so as to isolate the changes which have taken place in the physical output of goods and services.

Guild Socialism

This form of socialism accepts the leadership of artisans. The operation of the whole economy specially the management and control of industries lies in the hands of artisans Socialism established by artisans is termed a Guild Socialism.

HDI

HDI (Human Development Index) is a composite index measuring average achievement in three basic dimensions of human life–a long and healthy life, knowledge and a decent standard of living.

Import Duty

Import duty is a tax on imports imposed on an ad-valorem basis i.e., fixed in the form of a percentage on the value of the commodity imported.

Indirect Tax

Indirect tax is that tax which is levied on goods or services produced or purchased. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense to another.

Inflation

A situation of a steady and sustained rise in general prices is usually known as inflation. Inflation is a state in which the value of money is falling i.e., prices are rising.

Joint Demand

Joint demand appears in case of complementary goods. When two commodities are complementary to one another and cannot be used separately, they have joint demand. Bread and butter, sugar and tea, pen and ink are a few examples of joint demand. In joint demand a change in demand of one commodity bring about the proportionate change in demand for the other.

Joint Sector

When a sector is jointly owned, managed and run by both public and private sector, it is called joint sector. This sector indicates the partnership between the two i.e., public and private sector.

Labour Union

Labour union represents that organisation of workers which works for improving working condition of labours and also for raising their wage by adopting ‘collective bargaining’ measures with the management of the industry in particular.

Laffer Curve

This curve is given by American economist Prof. Arthur Laffer. It represents relationship between total tax revenue and corresponding tax rates.

Laissez Faire

It is a French word meaning ‘non-interference’. This doctrine was popularised by classical economists who gave the view that government should interfere as little as possible in the economic activities of the individuals.

Life Expectancy at Birth

The number of years a newborn infant would live if prevailing pattern of age specific mortality rates at the time of birth were to stay the same throughout the child’s life.

Liquidation

It refers to the termination (or winding up) of a registered company. Liquidation takes place because of company's insolvency. In liquidation, assets are turned into cash for settling outstanding debts and for apportioning the balance, if any, amongst the owners.

Liquidity

Assets which can easily be converted into cash money are said to have liquidity. Land does not possess liquidity at it takes longer time to get converted into cash.

Liquidity Ratio

The commercial banks under banking regulations have to maintain a certain specified proportion of their total deposits of various categories in liquid assets. This maintainable proportion is called liquidity ratio.

Lock-out

Lock-out refers to such a situation when the management does not permit the workers to work unless they agree to accept the employer's term. Lock-out is the closing of work by the management for an uncertain period of time to put pressure on the labour union. It is an action by the employer equivalent to a strike by employees.

Lorentz Curve

This curve shows the degree of inequalities of a frequency distribution in a graphical manner. It is a curve on a graph which shows the cumulative proportion of a statistical population against this cumulative share of some characteristic. This curve is commonly used to depict income distribution showing the cumulative percentage of people from the poorest up and their cumulative share of national income.

Lump Sum Tax

Lump sum tax is a fixed amount which has imperative nature irrespective of the income level. This tax is not equitable in nature.

Merit Goods

Merit goods refer those goods that are very essential to the society as a whole and hence the government ensures their availability to all consumers, regardless of their ability to pay to reasonable price.

Mixed EconomyIt refers to that economic system in which both private and public sector co-exists. Indian economy is an example of a mixed economy.

Monetary Policy

Monetary policy comprises all measures applied by the monetary authorities with a view to produce a deliberate impact on the nature and volume of money so as to achieve the objectives of general economic policy. It aims at regulating the flow of currency, credit and other money substitutes in an economy with a view to affect the total stock of such assets as well as to influence the demand of the community for such assets.

Monetary Reforms

When a new currency is introduced in a country due to hyperinflation or due to a deliberate policy measure (such as decimalization) it is termed as monetary reform.

Monopoly

Monopoly refers to that market structure where there is only one seller in the market who controls the entire market supply and no substitute of the product is available in the market.

Monopsony

Monopsony is that market situation in which there is only one single buyer of the product in the market. In other word, ‘buyer's monopoly’ is termed as monopsony.

Multinational Company

It is a large scale company which has its production base in several countries and the bulk of the production is produced in outside nations. This company produces more overseas
than they do in its parent country. Increased trade and economies of scale have encouraged such type of companies in the recent years.

National Income

In the simplest way it can be defined as ‘factor income accruing to the national residents of a country.’ It is the sum of domestic factor income and net factor income earned from abroad. Net national product at factor cost is called national income.

Net National Product (NNP)

When depreciation is deducted from GNP i.e., Gross National Product, we get Net National Product (NNP).

Oligopoly

Oligopoly is that form of imperfect competition in which there are only a few firms in the industry (or group) producing either homogeneous products or may be having product differentiation in a given line of production.

Open Economy

Open economy is that economy which is left free and the government imposes no restrictions on trade with areas outside that economy.

Okun’s Law

Arthur Okun presented an empirical relationship between cyclical movements in GNP and unemployment. Okun found that an annual 2•5% increase in the rate of real growth above the trend growth results in a 1% decrease in the rate of unemployment. This relationship is known as Okun’s Law.

Perfect Competition

Perfect competition is the market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price.

Poverty Line

Poverty line is a virtual line demarcating persons living below and above it. In India all those persons are treated living below poverty line who are not able to earn that much of income which is not sufficient to acquire food equivalent to 2100 calories per person per day in urban areas and 2400 calories per person per day in rural areas. As per UNDP, one US dollar (1993 PPP US $) per person per day is treated as poverty line.

PQLI

PQLI is known as Physical Quality of Life Index which is used to assess the level of social development. This index was developed by Jim Grant for The Overseas Development Council PQLI is calculated by using indices of (i) Adult literacy rate, (ii) IMR, (iii) Life Expectancy.

Price Mechanism

Price mechanism signifies the working of those market forces which establishes equilibrium in the economy. Laissez faire policy is the basis for the working of price mechanism.

Price Ring

It is an unofficial syndicate by which the prices are controlled with the prior understanding among the traders. These dealers under a price ring decide not to over-bid one another at the public auction to keep the prices low. This price ring may discourage outsiders from coming to the auctions.

Private Sector

Private Sector is that part of the economy which is not owned by the government and is under the hands of private enterprise. In other words, private sector is not under direct government control. Private sector includes the personal as well as the corporate sector.

Privatisation

Privatisation is the antithesis of nationalisation. When the government owned public industries are denationalised and the disinvestment process is initiated, it is called privatisation.

Public Debt

Public debt represents borrowing by the state and public authorities. All loans taken by the public authorities constitute public debt.

Public Goods

Public goods are those goods which belong to the entire community. None of the individual of the society can be made deprived of using these public goods. National defence, Police, Street lighting etc. are examples of public goods.

Public SectorPublic sector signifies those undertakings which are owned, managed and run by public authorities. Public sector includes direct government enterprise, the nationalized industries and public corporations. In this sector of the economy the government acts itself as an entrepreneur.

Peril Point

It indicates that point beyond which tariff reductions would threaten the existence of domestic industry.

Quick Asset

Those assets are quick assets which are liquid or nearly liquid in nature and easily be turned into cash.

Quoted Company

That company is called quoted company whose share prices are quoted on a stock exchange.

Reflation

It signifies general increase in the level of business activity in the economy. Reflation generally involves greater government expenditure and the easing of credit to encourage increased production.

Regressive Tax

It is a tax in which rate of taxation falls with an increase in income. In regressive taxation incidence falls more on people having lower incomes than that of those having higher incomes.

Repressed Inflation

It is a state in which aggregate demand is greater than the total supply of goods and services in an economy, but prices are prevented from rising to eliminate excess demand. The holding down of price is sometimes done by government as a means of suppressing inflation.

Reserve Asset Ratio

It is the ratio of a bank’s reserve assets to its eligible liabilities.

Revolving Credit

It is a bank credit that is renewed automatically until notice of cancellation is received. Revolving credits may be sanctioned for an unlimited amount in total but with a limit on
the amount that may be drawn at any one time or within a specified period, e.g., one month.

Seasonal UnemploymentIt is that unemployment which is caused by seasonal variation in demand for labour by various industries, such as agriculture, construction and tourism. Seasonal unemployment
normally declines in spring as more outdoor work can be undertaken.

Security

Security refers to a share, bond or government stock that can be bought and sold, usually on the stock exchange or on a secondary market, and carries a right to some form of income, either in the form of a fixed rate of interest or dividends.

Shadow PriceIt is an imputed value for a good based on the opportunity costs of the resources used to produce it such values are of particular significance in resolving problems of resource allocating with respect to the effect on welfare.

Share Capital

It is the amount of money raised by a company by issuing shares. The authorized share capital is the amount that a company is allowed to issue as laid down in its Articles of Association. The issued share capital is the amount actually issued i.e., the number of issued shares multiplied by their par value. Fully paid share capital is the amount raised by payment of the full par value of the issued shares.

Single Tax System

It is a system in which all tax revenues are raised from one form of taxation.

Socialism

The political doctrine that the means of production (machines, materials and output) should be owned by society and specifically either by the state, as in the case of nationalized industries or by the workers directly, as in the case of producer co-operatives.

Social SecurityProvision by the state out of taxation of welfare assistance to those in need as a result of illness, unemployment, or old age compare national insurance refers to social security.

Soft CurrencyA currency with limited convertibility into gold and other currencies, either because it is depreciating due to balance of payments difficulties or because controls have been placed on it to prevent the exchange rate falling.

Special Drawing Rights (SDRs)

It is a reserve asset (known as ‘Paper Gold’) created within the framework of the International Monetary Fund in an attempt to increase international liquidity, and now forming a part of countries official reserves along with gold, reserve positions in the IMF and convertible foreign currencies.

Special Tax (Unit Tax)

It is a tax imposed per unit of a commodity rather than on the value of the commodity compare ad-valorem.

Stabilization Policy

It is Government economic policy announced at reducing the cyclical and other fluctuations that take place in a market economy.

Stagflation

It is a state of the economy in which economic activity is slowing down, but wages and prices continue to rise. The term is a blend of the words stagnation and inflation.

Surplus Value

It is the difference between the amount paid to a factor and the revenue earned by selling the output it produced.

Tariff

It is a tax or a duty on imports, which can be levied either on physical units, e.g., per tonne (specific), or on value (ad-valorem). Tariffs may be imposed for a variety of reasons including; to raise government revenue, to protect domestic industry from subsidized or low-wage imports, to boost domestic employment, or to ease a deficit on the balance of payments.

Trade Gap

It signifies the size of the deficit (or surplus) in the balance of trade i.e., the difference in value between visible imports and exports.

Trade Union

It is an organisation of employees who join together to further their interests. Trade Unions negotiate on behalf of their members in collective bargaining with employers, and in the event of a dispute may put pressure on employers by withdrawing labour (i.e. strike) or by some less drastic form of action (i.e. go-slow, working to rule).

Transfer PaymentIt is a payment made by public authority other than one made in exchange for goods or services produced. Transfer payments are not the part of National Income. Examples includes unemployment benefit and child benefits.

Vital Statistics

Vital statistics refers to those data which are associated with vital events of masses like birth, death, marriage divorce etc.

VAT (Value Added Tax)

VAT seeks to tax the value added at every stage of manufacturing and sale, with a provision of refunding the amount of VAT already paid at the earlier stages to avoid double taxation. In other words, the tax already paid can be claimed at the next stage of value addition.

Wealth Tax

Wealth tax is that tax which is imposed on the value of total assets but the wealth upto a certain limit is exempted from such tax.

Welfare State

It refers to a nation that provides to all at least the minimum standards in respect of education, health, housing, pensions and other social benefits.

Wholesale Price Index
Wholesale Price Index is that index which is calculated on the basis of wholesale prices. It is calculated in a similar way to the Retail Price Index.