Economics Revision Notes for Govt Exams (UPSC, PCS, SSC, Bank, Railway, etc.): RBI Policy, Union Budget & More!

Detailed, structured notes on Economics, tailored for competitive exams like SSC, UPSC, Bank PO/Clerk, Railways, and others. The notes are organized from fundamental concepts to more advanced topics, with a focus on the Indian economy.

Comprehensive Economics Notes for Competitive Exams

Your Ultimate Guide to the Indian Economy

Part 1: Introduction to Economics

1. What is Economics?

• Economics is a social science that studies the production, distribution, and consumption of goods and services.
• It's essentially the study of scarcity and choice. Scarcity means human wants for goods and services exceed the available supply.
• Father of Economics: Adam Smith (Book: "An Inquiry into the Nature and Causes of the Wealth of Nations", 1776).

2. Branches of Economics

• Microeconomics: Studies the economic behavior of individual units like a person, a household, a firm, or an industry. It deals with prices, demand, supply, consumer behavior, and market forms.
• Macroeconomics: Studies the economy as a whole. It deals with aggregates like national income, inflation, unemployment, economic growth, and monetary/fiscal policy.

3. Types of Economies

• Capitalist Economy (Market Economy):
  • Ownership: Means of production are privately owned.
  • Motive: Profit.
  • Role of Government: Minimal (Laissez-faire).
  • Example: USA, UK.
• Socialist Economy (Command Economy):
  • Ownership: Means of production are owned by the state/community.
  • Motive: Social Welfare.
  • Role of Government: Complete control over economic decisions.
  • Example: Former USSR, China (though now mixed).
• Mixed Economy:
  • Ownership: Co-existence of both public (government) and private sectors.
  • Motive: Profit and Social Welfare.
  • Role of Government: Regulates and controls the private sector.
  • Example: India, France. India adopted the mixed economy model after independence.

Part 2: National Income Accounting

This is one of the most important topics. It measures the economic activity of a country.

1. Gross Domestic Product (GDP)

• Definition: The total monetary value of all final goods and services produced within the domestic territory of a country in a specific time period (usually a year).
• Key Points:
  • "Final Goods": Intermediate goods (like tires for a new car) are not counted to avoid double-counting.
  • "Within Domestic Territory": Includes production by foreign companies within India but excludes production by Indian companies outside India.
• Formula: GDP = C + I + G + (X - M)
  • C = Private Consumption
  • I = Investment
  • G = Government Spending
  • (X - M) = Net Exports (Exports - Imports)

2. Gross National Product (GNP)

• Definition: The total value of all final goods and services produced by the nationals of a country in a year, irrespective of where they are produced.
• Formula: GNP = GDP + NFIA
  • NFIA (Net Factor Income from Abroad): Income earned by Indians from abroad – Income earned by foreigners in India.

3. Net Domestic/National Product (NDP/NNP)

• Depreciation: The wear and tear or reduction in the value of capital goods (machinery, buildings) over time.
• Net Domestic Product (NDP): NDP = GDP - Depreciation.
• Net National Product (NNP): NNP = GNP - Depreciation.
• NNP at Factor Cost is the true National Income of a country.

4. Factor Cost vs. Market Price

• Factor Cost (FC): The actual cost of production (rent, wages, interest, profit).
• Market Price (MP): The price at which goods are sold in the market.
• Relationship:
  • GDP at MP = GDP at FC + Indirect Taxes – Subsidies
  • GDP at FC = GDP at MP - Indirect Taxes + Subsidies

5. Real vs. Nominal GDP

• Nominal GDP: GDP calculated at current year prices. It can increase due to an increase in production or just an increase in price (inflation).
• Real GDP: GDP calculated at constant prices (base year prices). It is the true indicator of economic growth as it reflects the change in the actual volume of goods and services.
• GDP Deflator: A measure of inflation.
  • GDP Deflator = (Nominal GDP / Real GDP) x 100

In India, National Income is estimated by the National Statistical Office (NSO).

Part 3: Inflation

1. Definition

A sustained increase in the general price level of goods and services in an economy over a period of time, leading to a fall in the purchasing power of money.

2. Key Terms

• Deflation: The opposite of inflation; a general decline in prices.
• Disinflation: A decrease in the rate of inflation. (e.g., inflation falling from 8% to 5%).
• Stagflation: A situation of high inflation, high unemployment, and stagnant economic growth. (Stagnation + Inflation).
• Skewflation: A significant price rise in only a small group of commodities (e.g., only food items).

3. Types of Inflation

• Demand-Pull Inflation: "Too much money chasing too few goods." Occurs when aggregate demand exceeds aggregate supply.
• Cost-Push Inflation: Occurs due to an increase in the cost of production (e.g., rise in wages, raw material prices like crude oil).

4. Measurement of Inflation in India

• Wholesale Price Index (WPI): Measures inflation at the wholesale level. Considers only goods. Published by the Office of the Economic Adviser, Ministry of Commerce and Industry.
• Consumer Price Index (CPI): Measures inflation at the retail level. Considers both goods and services. Published by the National Statistical Office (NSO). The RBI now uses CPI-Combined as its key measure for managing inflation.

Part 4: Monetary Policy and Banking in India

1. Reserve Bank of India (RBI)

• India's central bank.
• Established: April 1, 1935, under the RBI Act, 1934 (based on Hilton Young Commission's recommendation).
• Nationalized: January 1, 1949.
• Headquarters: Mumbai.
• Major Functions: Issuer of Currency, Banker to the Government, Banker's Bank and Lender of Last Resort, Controller of Credit (manages money supply), Manager of Foreign Exchange (FOREX).

2. Monetary Policy

• The policy of the RBI to control the supply of money, availability of money, and cost of money (or rate of interest) to attain a set of objectives for the growth of the economy.
• Monetary Policy Committee (MPC): Sets the policy rates in India. Has 6 members (3 from RBI, 3 from the Government). Meets at least 4 times a year. Mandate: To maintain inflation at 4% with a tolerance band of +/- 2% (i.e., within the 2-6% range).

3. Instruments of Monetary Policy (Extremely Important)

• A. Quantitative Tools (affect the total volume of credit):
  • Repo Rate: The interest rate at which the RBI lends money to commercial banks for the short term. To control inflation, RBI increases the Repo Rate.
  • Reverse Repo Rate: The rate at which RBI borrows money from commercial banks.
  • Bank Rate: The rate at which RBI lends long-term funds to commercial banks.
  • Cash Reserve Ratio (CRR): The percentage of a bank's total deposits that it needs to maintain as cash with the RBI. No interest is paid on CRR.
  • Statutory Liquidity Ratio (SLR): The percentage of a bank's deposits that it has to maintain with itself in the form of liquid assets (cash, gold, government securities).
  • Open Market Operations (OMO): The buying and selling of government securities by the RBI in the open market to inject or absorb liquidity.
  • Marginal Standing Facility (MSF): A window for banks to borrow from the RBI in an emergency overnight, at a rate higher than the Repo Rate.
• B. Qualitative Tools (affect the direction of credit):
  • Margin Requirements: The difference between the market value of a security and the loan amount granted against it.
  • Moral Suasion: Persuasion and request by the RBI to commercial banks to follow its policies.

4. Indian Banking System

• Commercial Banks: Public Sector Banks (e.g., SBI, PNB), Private Sector Banks (e.g., HDFC, ICICI), Foreign Banks (e.g., Citibank).
• Co-operative Banks: Work on the principle of cooperation, mainly for agriculture and rural sectors.
• Development Banks: Provide long-term finance for industrial and agricultural development (e.g., NABARD, SIDBI).

Part 5: Fiscal Policy and Public Finance

1. Fiscal Policy

The policy of the government related to its revenue (income) and expenditure to achieve certain macroeconomic goals. It is framed by the Ministry of Finance.

2. Government Budget (Union Budget)

• The "Annual Financial Statement" as per Article 112 of the Constitution.
• It is a statement of the estimated receipts and expenditures of the government for a financial year (April 1 - March 31).

3. Components of the Budget

• A. Revenue Budget: Deals with receipts and expenditures that do not impact the government's assets or liabilities.
  • Revenue Receipts: Tax Revenue (Direct/Indirect) and Non-Tax Revenue.
  • Revenue Expenditure: Spending that does not create assets (e.g., salaries, pensions).
• B. Capital Budget: Deals with receipts and expenditures that create assets or reduce liabilities.
  • Capital Receipts: Loans taken, disinvestment.
  • Capital Expenditure: Spending that creates assets (e.g., construction of roads).

4. Budget Deficits (Very Important)

• Revenue Deficit: Revenue Expenditure > Revenue Receipts.
• Fiscal Deficit: Total Expenditure > Total Receipts (excluding borrowings). This is the most important deficit.
• Primary Deficit: Fiscal Deficit – Interest Payments.

5. Taxation

• Direct Tax: Burden cannot be shifted (e.g., Income Tax).
• Indirect Tax: Burden can be shifted (e.g., GST).
• GST (Goods and Services Tax): Introduced on July 1, 2017. Administered by the GST Council.

6. Finance Commission

A constitutional body (Article 280) that recommends the distribution of tax revenues between the Union and the States.

Part 6: Economic Planning and Reforms

• Planning Commission (1950-2014): Formulated India's Five-Year Plans (FYPs). 1st FYP focused on Agriculture, 2nd FYP on Heavy Industries.
• NITI Aayog (National Institution for Transforming India): Replaced the Planning Commission on January 1, 2015. It's a government think tank. Chairperson: Prime Minister.
• Economic Reforms of 1991 (LPG Reforms): Liberalisation, Privatisation, Globalisation.

Part 7: Key Sectors of the Indian Economy

• Primary Sector: Extracts raw materials (e.g., Agriculture, Mining).
• Secondary Sector: Manufacturing and Industry (e.g., Construction).
• Tertiary Sector (Service Sector): Provides services (e.g., Banking, IT).
• Contribution to GDP (Approximate): Tertiary (~54%) > Secondary (~26%) > Primary (~20%).
• Contribution to Employment (Approximate): Primary (~44%) > Tertiary (~32%) > Secondary (~24%).

Part 8: Poverty, Unemployment, and Social Sector

• Poverty Line Committees: Tendulkar Committee, Rangarajan Committee.
• Unemployment Types:
  • Disguised Unemployment: More people employed than needed. Common in Indian agriculture.
  • Structural Unemployment: Mismatch between skills of workers and skills demanded.
  • Frictional Unemployment: Temporary unemployment when people change jobs.
• Key Government Schemes: MGNREGA, National Food Security Act (NFSA), PM-KISAN.

Part 9: External Sector

• Balance of Payments (BoP): A systematic record of all economic transactions between a country and the rest of the world.
  • Current Account: Records trade in goods and services.
  • Capital Account: Records international purchases and sales of assets (FDI, FPI).
• Foreign Exchange Reserves: Assets held by the RBI in foreign currencies, gold, SDRs.
• FDI vs. FPI: FDI is a long-term investment involving management control. FPI is a short-term investment in financial assets ("hot money").

Current Affairs 2025 Snapshot (For Quick Revision)

This section provides the most critical data points from the latest economic updates for your last-minute revision.

RBI Monetary Policy (As of June 2025)

• Policy Repo Rate: 5.50%
• Bank Rate: 5.75%
• Reverse Repo Rate: 3.35%

Union Budget 2025-26 Key Targets

• Fiscal Deficit Target (FY26): 4.4% of GDP
• New 'NIL' Taxable Income (New Regime): Up to ₹12 Lakh per annum
• FDI Limit in Insurance: Increased from 74% to 100%

How to Study Economics

1. Build Concepts: Focus on understanding why things happen.
2. Connect with Current Affairs: Link news to the static concepts you've learned.
3. Focus on India: Most questions are about the Indian economy and its policies.
4. Memorize Key Data: Revise data from the snapshot above before your exam.
5. Solve Previous Year Questions: This helps in understanding the exam pattern.