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Unit-1Money2Meaning of MoneyMoney (money supply)anything that is generally accepted in payment for goods or services or in the repayment of debts. Money supply is the total amount of money available in the economy. Wealththe total collection of pieces of property that serve to store value Incomeflow of earnings per unit of time 2What serves as moneyFor a money, we need it DivisibleIdentical (uniform)Storable and durableCompact (easy to carry): high value per unit of volume or weightWhat serves as money?Coin & Notes

What serves as moneyFirst paper money, 11th century in ChinaBank notes carried a guarantee that it could be traded at any time for coinage

6Functions of MoneyMedium of Exchangepromotes economic efficiency by minimizing the time spent in exchanging goods and services. A good medium of exchangeMust be easily standardizedMust be widely acceptedMust be divisibleMust be easy to carryMust not deteriorate quicklyUnit of Accountused to measure value in the economy: assets, goods, services.Store of Valueused to save purchasing power; allows intertemporal substitution of income most liquid of all assets but High inflation diminishes its store of value function.67Evolution of the Payments SystemCommodity Money: Gold, Silver, other precious metals, certain stones, etc.Representative money that is backed 100 % by precious metals (bank notes)ChecksElectronic Payments: EFTs, wire transfers. E-money: Debit cards (POS), etc.7Section 22 of RBI ActIn terms of Section 22 of RBI is the sole authority for issue of currency in India including one rupee coins/notes.One rupee coins/notes are issued by the Government of India but put into circulation through RBI.RBI took over the function of issue of notes from GOI from April 1, 1935. Actual notes were issued by RBI only in January 1938 and until then Bank was issuing currency notes of Government of India. What is a Currency Note?Currency Note is the same banknote pertaining to our Nation Indian Currency Note is called Indian Rupee (INR)Notes issued by RBI At present, banknotes in India are issued in the denomination of Rs.10, Rs.20, Rs.50, Rs.100, Rs.500, Rs.1000. Banknotes issued by RBI in the denominations of Rs.2 and Rs.5 has been discontinued and replaced fully with coins.Bank can also issue notes in the denomination of Rs.5000 and Rs.10000Notes of higher denominations of Rs.1000,Rs.5000 and Rs.10000 issued earlier (before 1946 and 1954) have been demonetized in 1978 and are no longer in circulation.Rs.500 demonetized in 1946 were reintroduced in 1987 and in the year 2000, Rs.1000 notes were reintroduced.Rupee coins and Small coinsRupee coins and Small coins are issued by Government of India through RBI.Rupee coins are Re.1, Rs.2,Rs.5 and Rs.10 and Small coins are issued in the denominations of Ps.25 and Ps.50. The highest denomination of coin that can be issued by GOI is Rs.1000 as per Section 6 of Coinage Act, 1906.Printing of Notes and Minting of CoinsNotes are printed by Government of India at its printing presses at Nashik and Dewas and at the presses of Bharatiya Reserve Bank Note Mudran Private Ltd. (BRBNMPL) at Mysore and Salboni.Coins are minted at the four Government Mints at Mumbai, Kolkata, Noida and Hyderabad.Presses are required to produce around 12,000 million pieces of notes per annum to maintain clean notes in circulation.The average life of a note in circulation varies from 1 year to 2 years.The cost of production of banknote is reimbursed by the Bank to the Press and the cost of production of coins is borne by GOI itself.The design, form and material of the bank notes are recommended by Central Board of Directors of RBI and approved by GOI.

Issue of Notes and Coins The issue of fresh notes and coins is conducted by RBI in the Issue Department.These fresh notes are stocked at the Currency Chest of RBI and other agencies.The currency chest is provided to a branch of public sector bank or to a Government Treasury, which has opted to function as an agent of RBI.Thus we have as on June 2007 a wide net work of 4,301 currency chests and 4,027 small coin depots apart from 18 Issue Offices, a sub-office at Lucknow and a currency chest at Kochi of Reserve Bank of India.Clean Note PolicyEnsuring adequate availability of good quality banknotes and coins is one of the core functions of RBI.Towards this various measures were initiated by RBI viz. speedier disposal of soiled banknotes, discontinuance of the practice of stapling of note packets, supply of adequate quantity of fresh notes to banks and mopping up of soiled and mutilated notes, particularly notes of lower denominations from circulation, regular removal of soiled banknotes from the currency chests and acceleration in mechanized processing of the notes at the offices of the RBI as also at Currency Chests by installing CVPS and SBS. Thus, there has been marked improvement in the quality of banknotes in circulation. Reserve Bank of India has been continuously making efforts to make good quality banknotes available to the members of public. To help RBI and banking system, the members of public are requested to ensure the following:Not to staple the banknotes Not to write / put rubber stamp or any other mark on the banknotes Store the banknotes safely to prevent any damage

Notes and Coins in circulation Data as on March 2007 (source: Annual Report- 2007) As on March 2007 - 38,831 million pieces in all denominations of banknotes valued at Rs.4,96,138 crores are in circulation.In volume terms, Rs.100 denomination notes had the largest share (34% of the total pieces in circulation) and in terms of value Rs.500 denomination notes had the largest share (45% of the total value of banknotes in circulation).Rupee Coins and small coins to the extent of 90,357 million pieces valued at Rs.8,021 crores are in circulation.In view of the reported mellting of Rs.2 cupro nickel coins due to rising metal prices, the GOI in consultation with the RBI decided to mint all denominations coins in ferritic stainless steel (FSS).The volume of banknotes supplied to the public during 2006-07 is to the tune of 11,472 million pieces valued at Rs.1,84,561/- crores

Capital FormationThe act of increasing the stock of capital in the economy is given the name of Capital Formation.

Capital formation means a situation where the society does not consume whole of its current income but directs a part of it for making capital goods like instruments, machines, plants, equipments, transport facilities, finished & semi-finished good.

In words of Singer Capital formation consists of both tangible goods like plants, tools and machinery and intangible goods like high standard of education, health, scientific tradition and research.

Process of Capital FormationGenerate SavingsMobilize SavingInvestmentCREATION OF SAVINGS

Savings are done by individuals or households. They save by not spending all their incomes on consumer goods. When individuals or households save. They release resources for the production of consumer goods. Workers, natural resources, materials etc thus released are made available for the production of capital goods.Types of Domestic SavingSAVINGSHOUSEHOLDPRIVATE SECTORPUBLIC SECTORFINANCIALSAVINGSPHYSICALASSETSINVESTMENT IN SHARES & DEBENTUREPOSSESSION OFCURRENCYGOVT SECURITIESLIFE INSURANCEPROVIDENT FUNDSSTOCKSMACHINERIESPUBLIC LTD CO(NON GOVT, NON FINANCIAL CO)NET PROFIT(FINANCIAL STATEMENT)ADMINISTRATIVE DEPTENTERPRISES NET PROFIT(FINANCIAL STATEMENT)

Will to saveApart from the power to save, the total amount of savings depends upon the will to save. Various personal, family and national considerations induce the people to save. People save in order to provide against old age and unforeseen emergencies. Some people desire to save a large sum to start a new business or to expand the existing business. Also, people want to make provision for education, marriage etc.MOBILIZATION OF SAVINGSSavings of the households must be mobilized and transferred to businessmen or entrepreneurs who require them for investment.In the capital market, funds are supplied by the individual investors ( who may buy securities or shares issued by companies), banks, investment trusts, insurance companies, finance companies, governments etc. INVESTMENT OF SAVINGS IN REAL CAPITAL.For savings to result in capital formation, they must be invested . In order that the investment of savings should take place, there must be a good number of honest and dynamic entrepreneurs in the country who are able to take risks and bear uncertainty of production.Investment will be made by entrepreneurs only if there is sufficient inducement to invest. Inducement to invest depends on the marginal efficiency of capital ( ie the prospective rate of profit) & rate of interest.Importance of Capital FormationIncrease productivity of various sectors: capital formation increases the stock of material and human capital. The productivity in agriculture, manufacturing and mineral sector etc increases.Increase in National Income: Capital formation helps in raising national output which in turn raises the rate and level of national income.Increase employment: The increased investment in various sectors of the economy leads to increase employment opportunities in a country.Break the vicious circle of poverty: it helps in breaking the vicious circle of poverty in the LDCs. Expansion of market: Capital formation makes it possible to produce the goods on large scale. As the good of one industry will be the inputs of other and so on. Thus the size of the market will be extended.Importance of Capital Formation:Control Inflation: Capital formation increases the supply of goods in the country. It thus helps in controlling inflation and bringing stability in the economy in the long-run.Self-Sufficiency: A country engaged in capital formation will be able to produce a variety of goods and make the country self-sufficient. This will reduce a countrys dependence on foreign countries.Correct Balance of Trade: Capital formation helps in building import-substitution industries. The reduced demand of the foreign goods helps in solving the problems of adverse balance of trade.Proper Utilization of Natural Resources: The adequate volume of capital formation makes it possible to utilize the natural resources of a country to the maximum extent and thus increase the rate of economic growth rapidly at a higher rate.Technological Progress: Technological progress requires higher rate of capital formation. The technological improvements helps in getting more output from the same resources.Building up of infrastructure: The building up of sound infrastructure like road, railways, communication system, power etc is an vital significance of capital formation which helps in breaking Vicious Circle of poverty.Sources of Capital FormationThere are two sources of capital formationDomestic Sources:Voluntary savings by household and business sectorsInvoluntary saving by transferring resources from consumers and producers to government through taxation.Government borrowingUse of idle resourcesDeficit financing

External Sources:Foreign AidRestrictions of importsDirect Foreign InvestmentVoluntary and Forced savingsSavings may either voluntary or forced.Voluntary savings are those savings which people do of their own free will.Taxes by the government represent forces savings.Deficit financingDeficit financing i.e newly created money is another source of capital formation. By issuing more notes and exchanging them with the productive resources, the government can build real capital. The method of deficit financing as a source of development finance is dangerous because it often leads to inflationary pressures in the economy.

DISGUISED UNEMPLOYMENTFor example, surplus agricultural workers can be transferred from agricultural sector to non agricultural sector without diminishing agricultural output. The objective is to mobilize these unproductive workers and employ them on various capital creating projects, such as roads, canals, building on schools, flood relief activities.In this way, the hitherto unemployed labor can be utilized productively and turned into capital.Foreign capitalCapital formation in a country can also take place with the help of foreign capital, ie foreign savings. Foreign capital can take the form of (a) direct private investment by foreigners, (b) loans or grants by foreign govts, (c) loans by international agencies like world bank India is receiving a good amount of foreign capital from abroad for investment and capital formation under Five- Year PlansCauses of Low Capital FormationThe following are the causes of low capital formation in LDCs:Vicious Circle of poverty: The low capital formation in LDCs is attributed to vicious circle of poverty which operates in LDCs. It is because of VCP the incomes, savings, investment and productivity of the people remains limited and obstructed.Population explosion