Important Terms and Concepts related to Indian Economy: Target IAS 2018 and Beyond

A. Gross fixed capital formation (GFCF) –

It refers to the net increase in physical assets (investment minus disposals) within the measurement period. GFCF is called “gross” because the measure does not make any adjustments to deduct the consumption of fixed capital (depreciation of fixed assets) from the investment figures. It also does not include land purchases. It is a component of expenditure approach to calculating GDP.


B. Base Effect –

Inflation is calculated taking into account index number for present month and corresponding month in the previous year i.e. index figures for july this year and july last year and not july this year and june this year).

The base effect refers to the impact of the rise in price in the previous year level (i.e. last year’s inflation) over the corresponding rise in price levels in the current year (i.e., current inflation): if the price index had risen at a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to a relatively lower inflation rates.

On the other hand, if the inflation rate was too low in the corresponding period of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current inflation.




C. Liquidity Adjustment Facility (LAF) –

Liquidity Adjustment Facility (LAF) is the primary instrument of Reserve Bank of India for modulating liquidity and transmitting interest rate signals to the market. It refers to the difference between the two key rates viz. repo rate and reverse repo rate.

Informally, Liquidity Adjustment Facility is also known as Liquidity Corridor. Under Repo, the banks borrow money from RBI to meet short term needs by putting government securities (G-secs) as collateral (which are not a part of SLR).

Under Reverse Repo, RBI borrows money from banks by lending securities. While repo injects liquidity into the system, the Reverse repo absorbs the liquidity from the system. RBI only announces Repo Rate. The Reverse Repo Rate is linked to Repo Rate and is 100 basis points (1%) below repo rate.

RBI makes decision regarding Repo Rate on the basis of prevalent market conditions and relevant factors. The tenure of the Repo is seven working days.



D. Marginal Standing Facility (MSF) –

It is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank of India in its credit policy of May 2011. MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities (which can be a part of SLR).

Overall idea behind the MSF is to contain volatility in the overnight inter-bank rates. Rate of Interest The rate of interest on MSF is above 100 bps above the Repo Rate.


E. Market stabilisation scheme (MSS) bonds –

These are special bonds floated on behalf of the government by the RBI for the specific purpose of mop ping up the excess liquidity in the system when regular government bonds prove inadequate.

These are mostly shorter-tenure bonds, of less than six months maturity. But the tenure differs depending on the requirement. The sudden surge in deposits due to the surrender of demonetised currency notes in large quantities skews bond yields and interest rates, disrupting the functioning of the market.

To impound the excess liquidity, bankers felt MSS bonds were a better option than a hike in CRR holdings.



F. Nominal Effective Exchange Rate –

The nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one country’s currency exchanges for a basket of multiple foreign currencies i.e. It is the value of basket of foreign currencies in terms of Indian rupee.

If NEER value is high then other country currency could buy more of Indian products then exports would increase. In economics, the NEER is an indicator of a country’s international competitiveness.


G. Real Effective Exchange Rate – The real effective exchange rate (REER) is the weighted average of a country’s currency relative to an index or basket of other major currencies, adjusted for the effects of inflation.


H. Index of Industrial Production –

Index of Industrial Production (IIP) measures the quantum of changes in the industrial production in an economy and captures the general level of industrial activity in the country.

It is a composite indicator expressed in terms of an index number which measures the short term changes in the volume of production of a basket of industrial products during a given period with respect to the base period.

IIP is a short term indicator of industrial growth till the results from Annual Survey of Industries and National Accounts Statistics are available. The base year is always given a value of 100. The current base year for the IIP series in India is 2004- 05.

So, if the current IIP reads as 116 it means that there has been 16% growth compared to the base year. Index of Industrial Production is compiled and published every month by Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation with a time lag of six weeks from the reference month.


I. Emission Intensity of GDP –

Emission intensity is the volume of emissions per unit of GDP. Reducing emission intensity means that less pollution is being created per unit of GDP.


J. Green Energy Corridor –

The Government in 2013 announced a National Green Corridor Program (NGCP) worth Rs. 43,000 Crore to enable the flow of renewable energy into the National Grid Network.

Specifically, the green energy corridor is grid connected network for the transmission of renewable energy produced from various renewable energy projects.




K. National Adaptation Fund on Climate Change (NAFCC) –

The National Adaptation Fund on Climate Change (NAFCC) has been established in August 2015 to meet the cost of adaptation to climate change for the State and Union Territories of India that are particularly vulnerable to the adverse effects of climate change.

Government has set up a budget provision of Rs.350 crores for the year 2015-16 and 2016-17, with an estimated requirement of Rs.181.5 crores for financial year 2017-18 for NAFCC.

The projects under NAFCC prioritize the needs that builds climate resilience in the areas identified under the SAPCC (State Action Plan on Climate Change) and the relevant Missions under NAPCC (National Action Plan on Climate Change).



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