Economics & Business Essentials

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Money Market vs. Capital Market Feature Money Market Capital Market Maturity Period Short-term (up to 1 year) Long-term (over 1 year) Purpose Meeting short-term liquidity needs Raising long-term capital for investment Instruments T-Bills, Commercial Paper, CDs, Repos Stocks, Bonds, Debentures Participants Banks, RBI, financial institutions Individuals, corporate, FIIs Risk Low risk Higher risk Return Lower return Higher return potential Regulator RBI SEBI Money Market and its Instruments The money market is a segment of the financial market where financial instruments with high liquidity and very short maturities are traded. It provides an avenue for borrowers and lenders to meet their short-term financial needs. Instruments: Treasury Bills (T-Bills): Short-term debt instruments issued by the government, highly liquid, zero-coupon. Commercial Paper (CP): Unsecured promissory notes issued by large corporations to raise short-term funds. Certificates of Deposit (CDs): Time deposits issued by banks and financial institutions, negotiable in the secondary market. Call/Notice Money: Short-term interbank lending for 1 day (call) or 2-14 days (notice). Repo/Reverse Repo Agreements: Agreements to sell securities with an agreement to repurchase them at a later date (repo) or to buy with an agreement to resell (reverse repo). Importance of Stock Exchange for the Economy A stock exchange is a marketplace where securities are bought and sold. Its importance to the economy is multifaceted: Capital Formation: Facilitates mobilization of savings for productive investments, leading to capital formation. Liquidity: Provides a platform for investors to buy and sell shares, offering liquidity to their investments. Resource Allocation: Directs capital towards efficient and profitable companies, promoting optimal resource allocation. Economic Barometer: Stock market indices (e.g., Sensex, Nifty) reflect the overall health and sentiment of the economy. Corporate Governance: Listed companies are subject to stringent regulations, promoting transparency and good corporate governance. Investment Opportunities: Offers individuals and institutions opportunities to invest and grow their wealth. Foreign Investment: Attracts foreign institutional investment (FII), boosting foreign exchange reserves. Labour Legislation: The Four Codes & Challenges India has consolidated 29 central labour laws into four broad codes to simplify and modernize labour regulations. The Four Labour Codes: Code on Wages, 2019: Amalgamates 4 laws related to wages, bonus, and equal remuneration. Aims for universal minimum wage and timely payment. Industrial Relations Code, 2020: Consolidates 3 laws related to trade unions, industrial disputes, and standing orders. Introduces new thresholds for retrenchment/closure and provisions for dispute resolution. Code on Social Security, 2020: Integrates 9 laws related to social security (provident fund, ESI, gratuity, maternity benefit, etc.). Expands coverage to gig workers and unorganized sector. Occupational Safety, Health and Working Conditions Code, 2020: Replaces 13 laws related to safety, health, and working conditions. Sets standards for workplaces, hours of work, and welfare facilities. Challenges: Implementation Issues: Effective enforcement across diverse sectors and states remains a challenge. Employer Concerns: Some fear increased compliance burden and rigidity in hiring/firing, especially for MSMEs. Worker Concerns: Trade unions express apprehension about diluted worker rights, ease of retrenchment, and reduced collective bargaining power. Universal Coverage: Ensuring social security and minimum wages for all, including informal and gig workers, is complex. State-Level Variations: States need to frame their own rules, leading to potential inconsistencies. Industrial Dispute An industrial dispute, as per the Industrial Disputes Act, 1947, is "any dispute or difference between employers and employers, or between employers and workmen, or between workmen and workmen, which is connected with the employment or non-employment or the terms of employment or with the conditions of labour, of any person." Common Causes: Wages and Allowances: Disagreements over pay, bonuses, dearness allowance. Working Conditions: Issues related to working hours, safety, leave, welfare facilities. Retrenchment/Lay-offs/Closures: Disputes arising from termination of employment. Trade Union Rights: Recognition of unions, collective bargaining. Disciplinary Actions: Protests against suspensions, dismissals. Technological Changes: Introduction of new technology leading to job losses or skill changes. Resolution Mechanisms: Conciliation: A third party (conciliator) helps parties reach a mutual agreement. Mediation: Similar to conciliation, but the mediator may offer non-binding suggestions. Arbitration: Parties agree to refer the dispute to a neutral third party (arbitrator) whose decision is binding. Adjudication: Referral of the dispute to Labour Courts, Industrial Tribunals, or National Tribunals for a binding decision. Collective Bargaining: Direct negotiations between employers and trade unions. Collective Bargaining Collective bargaining is a process of negotiation between employers (or their representatives) and a group of employees (usually represented by a trade union) to regulate working conditions, wages, benefits, and other aspects of workers' employment. Key Characteristics: Bilateral Process: Involves two parties – management and workers' representatives. Group Action: Deals with employees collectively, not individually. Continuous Process: Not a one-time event; agreements are periodically renegotiated. Voluntary: Typically, both parties voluntarily engage in the process. Dynamic: Adapts to changing economic and industrial conditions. Power Balancing: Aims to balance the power between employers and individual employees. Objectives: To secure fair wages and better working conditions for employees. To protect employees from arbitrary management actions. To resolve industrial disputes peacefully. To establish rules and procedures for workplace relations. To improve productivity and industrial harmony. Types: Distributive Bargaining: Focuses on dividing a fixed pie (e.g., wage increases). Integrative Bargaining: Seeks win-win solutions where both parties benefit. Productivity Bargaining: Links wage increases to improvements in productivity. NITI Aayog vs. Planning Commission of India Feature Planning Commission NITI Aayog Formation 1950, by an executive resolution 2015, by an executive resolution Nature Top-down approach, centralized planning Bottom-up approach, "Think Tank" Role Allocated funds, formulated Five-Year Plans Policy think tank, advisory body, fosters cooperative federalism Composition Deputy Chairman, full-time members, no state representation Vice-Chairman, full-time members, Governing Council (CMs of all states, LGs of UTs) Powers Imposed policies on states, financial powers Advisory only, no financial allocation powers Relationship with States States were consultees, not equal partners States are equal partners, active participation in policy formulation Five Plans of India - Achievements & Failures (Illustrative) India adopted Five-Year Plans from 1951 to guide its economic development. Here's a brief look at some illustrative plans: First Five-Year Plan (1951-1956) Focus: Agriculture, irrigation, power projects. Achievements: Significant growth in agricultural production, establishment of major irrigation projects (e.g., Bhakra Nangal Dam). Failures: Limited industrial development, reliance on foreign aid. Second Five-Year Plan (1956-1961) Focus: Rapid industrialization, heavy industries (Mahalanobis Model). Achievements: Establishment of steel plants (Bhilai, Durgapur, Rourkela), growth of public sector enterprises. Failures: Food crisis, increased inflation, foreign exchange shortage. Third Five-Year Plan (1961-1966) Focus: Self-reliance, agriculture, basic industries. Achievements: Initial steps towards Green Revolution, some industrial diversification. Failures: Severely impacted by Sino-Indian War (1962) and Indo-Pak War (1965), severe droughts, led to plan holiday. Sixth Five-Year Plan (1980-1985) Focus: Poverty alleviation (Garibi Hatao), infrastructure, energy. Achievements: Significant reduction in poverty, growth in agricultural and industrial output, integrated rural development programs. Failures: Rising fiscal deficit, persistence of regional disparities. Twelfth Five-Year Plan (2012-2017) - The last plan Focus: "Faster, More Inclusive, and Sustainable Growth." Achievements: Continued economic growth (though below target), focus on social sector programs. Failures: Growth targets not fully met, challenges in achieving complete inclusion and sustainability goals. WTO - Objectives, Functions, GATT, GATS, TRIPS The World Trade Organization (WTO) is an intergovernmental organization that regulates international trade. It officially commenced on January 1, 1995, under the Marrakesh Agreement, replacing the General Agreement on Tariffs and Trade (GATT). Objectives: To reduce barriers to international trade. To help trade flow as smoothly, predictably, and freely as possible. To ensure that trade rules are non-discriminatory. To raise living standards, ensure full employment, and a large and steadily growing volume of real income and effective demand. To allow for the optimal use of the world's resources. To protect the environment and promote sustainable development. Functions: Administering existing trade agreements. Acting as a forum for multilateral trade negotiations. Providing a mechanism for resolving trade disputes. Monitoring national trade policies. Offering technical assistance to developing countries. Cooperating with other international organizations. Key Agreements: GATT (General Agreement on Tariffs and Trade): Governs trade in goods. Formed in 1948, it was the precursor to the WTO and focused on reducing tariffs and other barriers to merchandise trade. GATS (General Agreement on Trade in Services): Extends multilateral trading rules to services (e.g., banking, tourism, telecommunications). TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights): Establishes minimum standards for intellectual property regulation (e.g., copyrights, patents, trademarks). GATT - 4 Principles + 3 Additional Principles The General Agreement on Tariffs and Trade (GATT) laid the foundation for the multilateral trading system. Its core principles aim to promote free and fair trade. The 4 Core Principles: Non-Discrimination (Most-Favoured-Nation - MFN): A country must treat all its trading partners equally. If a special favour is granted to one country, it must extend to all other WTO members. Non-Discrimination (National Treatment): Imported and locally produced goods should be treated equally, at least after the foreign goods have entered the market. Reduction of Trade Barriers (Tariffication): Tariffs are preferred over non-tariff barriers, and countries commit to binding tariffs at agreed-upon levels. Predictability (Binding and Transparency): Through binding tariffs and transparent trade policies, the trading environment becomes more predictable, encouraging investment. 3 Additional Principles: Fair Competition: Discourages unfair trade practices like dumping and subsidies. Development and Economic Reform: Acknowledges the special needs of developing countries, allowing them some flexibility and special provisions. Dispute Settlement: Provides a mechanism for resolving trade disputes between member countries. IMF - Objectives, Functions and Structuring The International Monetary Fund (IMF) is an international organization, headquartered in Washington, D.C., consisting of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Objectives: To promote international monetary cooperation. To secure financial stability. To facilitate international trade. To promote high employment and sustainable economic growth. To reduce poverty around the world. Functions: Surveillance: Monitors the international monetary system and the economic and financial policies of its member countries. Financial Assistance: Provides loans to member countries experiencing actual or potential balance of payments problems. Conditionality is usually attached to these loans. Technical Assistance and Training: Offers expertise and training to help member countries strengthen their capacity in economic and financial policy management. Structuring: Board of Governors: The highest decision-making body, consisting of one governor and one alternate governor from each member country (usually finance ministers or central bank governors). International Monetary and Financial Committee (IMFC): Advises the Board of Governors on the direction of the international monetary system. Executive Board: Responsible for day-to-day operations, comprising 24 Executive Directors representing all 190 member countries. Managing Director: Head of the IMF staff and Chairman of the Executive Board, appointed by the Executive Board. IBRD (International Bank for Reconstruction and Development) The IBRD is one of five institutions that comprise the World Bank Group. Established in 1944 at the Bretton Woods Conference, its original mission was to finance the reconstruction of nations devastated by World War II. Objectives: To reduce poverty in middle-income and creditworthy poorer countries. To promote sustainable development through loans, guarantees, risk management products, and analytical and advisory services. To facilitate economic development and reconstruction. Functions: Provides loans to middle-income and creditworthy low-income countries for development projects. Mobilizes financial resources from international capital markets. Offers technical assistance and knowledge sharing on development issues. Focuses on areas like infrastructure, education, health, and public administration. IBRD's funding comes primarily from issuing bonds in international capital markets. It aims to achieve both financial sustainability and development impact. Case Study: Maruti Suzuki Manesar Dispute (2012) The Maruti Suzuki Manesar plant dispute in July 2012 was a major industrial conflict in India, highlighting complex issues of labour relations, unionization, and violence in industrial settings. Background: Persistent labour unrest at the Manesar plant since 2011, primarily over the right to form an independent union (Maruti Suzuki Workers Union - MSWU) distinct from the existing company-backed union. Earlier strikes in 2011 had resulted in agreements, but underlying tensions remained. The Incident (July 18, 2012): A supervisor allegedly abused a Dalit worker, leading to a confrontation. This escalated into widespread violence, arson, and property damage at the plant. Tragically, a senior HR manager was killed, and many others were injured. Immediate Aftermath: The company declared a lockout at the Manesar plant for over a month. Police investigation led to the arrest of over 140 workers. Significant production losses and damage to Maruti Suzuki's brand image. Key Issues & Challenges Revealed: Union Recognition: The core issue was the management's reluctance to recognize the independent union (MSWU), leading to feelings of disenfranchisement among workers. Contract Labour: High proportion of contract workers, often with lower pay and fewer benefits than permanent employees, fueled resentment and a sense of exploitation. Communication Gap: Breakdown in communication and trust between management and workers. Industrial Violence: The incident underscored the potential for violence when industrial relations deteriorate, leading to severe consequences for individuals and the company. Impact on FDI: Raised concerns among foreign investors about the labour climate in India. Long-term Implications: Maruti Suzuki implemented stricter labour policies and enhanced security measures. The incident led to a re-evaluation of labour laws and industrial relations practices in India. Highlighted the need for effective grievance redressal mechanisms and fair labour practices to prevent such escalations. Many workers faced severe legal consequences, with some eventually convicted for murder and rioting. Other Important Concepts (Brief Mentions) Smoot-Hawley Act (1930) A US law that raised tariffs on over 20,000 imported goods to record levels. It is widely considered to have exacerbated the Great Depression by triggering retaliatory tariffs from other countries, leading to a collapse in global trade. Imperial Preference A system of reciprocal trade agreements between the United Kingdom and its colonies or former colonies (Commonwealth nations), affording preferential tariff treatment to goods from within the empire. It aimed to strengthen economic ties within the British Empire. Atlantic Charter (1941) A pivotal policy statement issued during World War II by the US and UK, outlining their vision for the post-war world. It included principles like self-determination, free trade, freedom of the seas, and disarmament. It laid groundwork for the United Nations and post-war international economic order.