Daily Quiz: UPSC Prelims Marathon – December 11, 2018

A Non-Banking Financial Company (NBFC) is a company a) registered under the Companies Act. 1956, b) its principal business is lending, investments in various types of shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, chit business, and c) its principal business is receiving deposits under any scheme or arrangement in one lump sum or in instalments. However, a Non-Banking Financial Company does not include any institution whose principal business is agricultural activity, industrial activity, trading activity or sale/purchase/construction of immovable property. (Section 45 I (c) of the RBI Act, 1934)

• Infrastructure Debt Fund (IDF), Asset Finance Co.s (AFC), Infrastructure Finance Company, Investment Co.s, Factor Company(Factoring business ex. HSBC) etc are regulated by Reserve Bank of India(RBI)
• Merchant Banking Companies, Venture Capital Fund, Stock Brokers, Mutual Funds are regulated by Securities and Exchange Board of India (SEBI).

Participatory notes also called P-Notes are offshore derivative instruments with Indian shares as underlying assets. These instruments are used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments. Participatory notes are issued by brokers and FIIs registered with SEBI. The investment is made on behalf of these foreign investors by the already registered brokers in India. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.

• The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate Laffers main premise that the more an activity such as production is taxed, the less of it is generated. Likewise, the less an activity is taxed, the more of it is generated.
• The Phillips curve is an economic concept developed by A. W. Phillips showing that inflation and unemployment have a stable and inverse relationship. The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.

Interest on public debt: It is not included in the national income as it is the interest paid on loans taken by government to meet its consumption purposes. Winning of a lottery prize: It will not be included in the national income as it does not add to the flow of goods and services in the economy. Profit earned by foreign banks in India: It is not included in the national income as it is a part of the factor income paid abroad. It is subtracted from domestic income to get national income.

Payment of fees to a lawyer engaged by a firm: It is an intermediate expenditure for the firm because it involves purchase of services by one production unit (firm) from another production unit (lawyer). So, it is deducted from the value of output of the firm to arrive at the value added. So, it is not included in national income.

A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the government’s actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue.

Note: Revenue deficit includes only such transactions which affect current income and expenditure of the government.

Concepts of Money Supply:

Ml = C + DD + OD

Where, C = Currency with the public

DD = Demand deposits with the public in the commercial and cooperative banks.

OD = Other deposits held by the public with Reserve Bank of India

M2 = M1 + Savings deposits with the post office savings banks.

M3= M1+ Time Deposits with the banks.

M4 = M3 + Total Deposits with Post Office Savings Organisation.