Preparing for GS Paper III – Economy

Many people have been asking me about how to prepare for Economics. So, here it goes.

For the GS Paper III, you don’t need to be an economist to answer the questions that are being asked. You need to be a generalist.

The ONLY book I’ve read for Economy part in GS Paper III is the Macroeconomics – NCERT. It helped me in getting the basics right. After that I DID NOT refer to any other book at all. I feel that Economy is all about understanding the meanings of various terms correctly. Once you understand what a term really means, the logic that goes around that term isn’t very difficult to understand. So for this purpose I’ve maintained a table of 2 columns, in my notes, consisting of various terms in one column and their definitions + relevant contemporary examples in the other column.

To get the list of different terms I did 2 things, but before I mention that I based my preparation on one basic assumption. That is, UPSC will not ask for an Economics concept which has not been in news/Union Budget/Economic Survey. I believed that it is rational for me to think that there is no reason why UPSC would ask a question on a topic which doesn’t fit into this criteria. Being an ardent follower of newspapers, I believed that I wouldn’t miss any important topic or issue that comes up in the newspapers. So with this as my base, I did the following 2 things:

  1. Whenever I see any new Economics related term in newspapers that I don’t know, I would first go and study the definition and try to understand the concept in the context of the newspaper article. This made it easy for me to remember the concept. For example, I read about “Sovereign Debt Crisis” in the context of Greek crisis. It serves me 2 purposes – understanding the concept well and also remembering that concept well because I have the context of some contemporary issue around that concept.
  2. Went through Economic Survey and Union Budget, not to get a hold of the numbers scattered in there, but to identify different terms (like ‘tax expenditure’) and then know their meanings (by looking it up in the internet). This year’s economic survey is quite good – especially the First Volume. Several concepts were well explained there and I strongly recommend the aspirants to go through it, from the mains point of view.

Apart from this, I’ve also read the Fourteenth Finance Commission Report and I’ve written an analysis on it earlier, which can be found here. In summary, the sources that I had followed:

  • Macroeconomics – NCERT
  • Newspapers
  • Economic Survey and Budget for identification of different terms

NO OTHER SOURCE WHATSOEVER!! 🙂

Opinion – Should the government have a say in the Monetary Policy?

Before answering this question, let us first take a quick look at the present formulation of the Monetary Policy.

Current Scenario: Monetary Policy of India is framed by the RBI headed by the Governor. He/She will be advised by the Deputy Governors and a Technical Advisory Committee for the Monetary Policy, but the advice rendered is not binding on the Governor.

Though the RBI doesn’t define the objectives of the monetary policy, some of them can be discerned as the following:

  • Price control – inflation targeting.
  • Ensuring adequate credit flow to sustain economic growth – growth targeting.

Problems with the present Monetary Policy:

  • The monetary policy must go hand in hand with the fiscal policy, but often we see dissent between the two, due to the lack of adequate coordination between the government (Ministry of Finance) and the RBI. As a result the Indian economy is not realising its full potential. For example, till December 2014, the RBI refused to accept the demand of the government to lower the interest rates to stimulate the economy. Keeping aside the merits and de-merits of this decision of the RBI, the dissent between the two is evident. The government which runs on the people’s mandate should definitely have a say in the monetary policy.
  • The present monetary policy holds an element of unpredictability as the guidelines of the monetary policy have not been specified. Having a predictable policy will ensure stability in the economy. Although some amount of unpredictability is required in the monetary policy, the present system swings far too much towards unpredictability. For example, the the RBI refused to lower the interest rates until Jan 2015 despite the industrial expectations of an early cut (as the inflation got tamed since June 2014).
  •  Also there is no adequate transparency and accountability in the formulation of the monetary policy. This needs to be addressed to improve the governance in the formulation of the monetary policy.
  • Recently, the RBI accepted Urjit Patel Committee’s recommendation of adopting CPI as the nominal anchor of the monetary policy. This makes sense at a time when India is fighting the inflation, but this doesn’t make sense in the long term.

It is in this regard, several committees like Financial Sector Legislative Reforms Committee (FSLRC) and Urjit Patel Committee, have recommended the establishment of a Monetary Policy Committee to formulate the monetary policy. The monetary policy shall be formulated by this committee on the basis of majority vote and they shall be held accountable.

Composition of Monetary Policy recommended by FSLRC:

  • Chairman (Governor)
  • Deputy Chairman (Dt. Governor)
  • 5 External full time members to be appointed by the RBI.
    • 2 of them must be appointed after seeking the opinion of RBI.
  • 1 representative from the government with no voting rights.

Composition of Monetary Policy recommended by Urjit Patel Committee:

  • Governor
  • Dt. Governor
  • Executive Director of the monetary policy
  • 2 External full time members appointed by the RBI

Since Urjit Patel Committee was constituted by the RBI, its recommendations ensure the domination of RBI in the monetary policy 😉

No doubt, there should be greater convergence between the monetary policy and the fiscal policy. For this it would be more appropriate to ensure that the government has a say in the formulation of the monetary policy as it will ensure that the concerns of the government backed by public mandate are addressed in the formulation of the monetary policy. In this regard, the recommendations of the FSLRC would be more appropriate to be implemented.

So, yes, the government should have a say in the formulation of the Monetary Policy.