UNIT-5 ECONOMY

 A)THE ROLE OF PUBLIC,PRIVATE AND JOINT SECTOR:

Public sector in India:

• Public sector consists of undertaking  which are directed either by a branch of government itself or by a body set up by government to direct the undertaking.
• A public sector enterprise is by definition “an enterprise where there is no private ownership,where its functions are not merely confined to the maximisation of profits or the promotion of the private interest of the enterprise, but are governed by the public or social interest, and where the management is responsible to the government either directly as in a departmental undertaking or indirectly as in government companies and corporation”.

The public sector undertaking in India cover a very wide range.:

1. Manufacturing industry like steel [Bhilai, Durgapur,Rourkela, Bokaro,Visakhapatnam steel plant. Heavy electricals [Bharat Heavy electrical machine tools.Hindustan Machine, Tools Ltd etc.]

2. Oil exploration,Production, repairing and distribution [ONGC] 

3. Life and general insurance.

4. Banking.[Nationalized bank.]

5. Air transport.[Indian Airlines corporation.]

6. Trade internal and foreign.[Food Corporation of India, State Trading Corporation, etc.]

• The public sector has now come to occupy a pivotal Position in the Indian economy, especially in the industrial sector.In fact, there has been a spectacular growth of the public sector in India. 
• Causes for the expression of public sector experience in India.

There were many areas in which the private sector either did not want to enter or was incapable of investing.Lack of enterprise on the part of private sector was the reason for the government to take up those areas.

1. Government had no option but to take over the sick undertaking and run them in the interest of national economy.

2. A Third reason for the formation of public sector.Undertakings was natural resource exploitation, or rather mis-exploitations, which was in the hands of a number of private sector agencies. 

3. A fourth reason was the malpractice in the area of private trading.

4. A fifth region was the operational flexibilities and freedom that a corporate organization provides as compared to a government even for activities of a purely Development nature. 

5. A sixth reason was the  need to provide some competition to the private sector

Role of public sector:

Rapid industrial development- As India requires quick and rapid development of industries, the state has to assume a dominant role in industrialization. Some of the basic and Heavy Industries which are not generally undertaken by the private enterprise as they yield very often low rate of profit are to be started by the public.

Provision of infrastructure.- There is the need of adequate infrastructure for rapid industrial development and particularly for the private sector to undertake enterprise. Infrastructure has to be provided by the government as public utilities.

Social overhead.- It is for the public sector to create social overheads like institutions for research and general and technical education, hospitals, etc. The private investor cannot be expected to put his.capital in such projects where no money returns can be expected.

Instrument of social- There are several desirable Social objectives for which the government can only rely on the public sector.One such objective is the reduction of economic inequalities and lessening of disparities in income and wealth. 

Balance regional.development- The private sector as it is interested in its own profit motive may not start.Enterprise in backward and underdeveloped regions, the public sector can do what the private sector cannot do.

Optimum allocation of resources- The scarce resources should be put to the best possible uses.The private sector which is profit motivated, mis-allocate the resources by providing non-essential luxury goods at a time when the need is that of  producing the necessary for masses. 

Shortcoming of public enterprises:

1. Mounting losses.-Some public sector undertakings on low profits and some others are making losses. Losses of these public sectors are mounting year after year due to the following reason:

2. Price policy.-The Surprising policies of the public sector undertakings are not guided solely by the profit maximization principles, but are under the regulation and control of the government.Under public Utility approach  Some undertakings imply a pricing policy that yield a no profit, no loss situation.

3. Over capitalization.-Public sector projects are charged with over capitalization.The input output ratio obtaining in many projects is unfavourable.The cause leading to overcapitalization can be traced to inadequate planning, delays and avoidable expenditure. 

4. He's in completion and increase in cost of construction.-Many of the public projects take longer time to complete than is initially envisaged. Due to this, the cost of the project is also Revised upper words.This is due to poor and inadequate project planning

5. Use of manpower resources in excess of actual requirements.-This is poor manpower planning and this is clearly reflected in the inadequate arrangements for training and education of workers.Play.

6. Under utilization of capacity.-, many power sector undertaking operate in the capacity utilization round half to two third.And even below the half utilization of rated capacity. This is certainly not an optimum situation.

7. Decision making.-If decisions are not taken and implemented in time, the resultant time and cost overruns are likely to result in imbalances among mutually  inter-related projects and may lead to under over utilization of capacities and thus affect the productivity of investment in an overall sense. 

Private sector in India:

Private enterprises are normally small units owned and managed by individual.Proprietors and partnerships, and only in a minority of cases there are public limited companies. Private sector is also called the corporate industrial sector.Private sector enterprises are Characterized by ownership and management in private hands, personal initiative and profit motive.The private sector embraces or the whole of agriculture and allied activities, plantation, mining, internal and international trade, etc. In the mixed economy of India, the private sector plays a complementary role to the public sector.The private sector is considered most suitable to consumer goods industries, which involve limited and short gestation periods. 

Role of the private sector in India:

General economic development by the private sector-The private sector is responsible for the setting up and expansion of industries such as cotton and jute textile, sugar, paper, edible oils, iron and steel industries, etc, the private sector is given sufficient.Scope to produce intermediate goods and machines. 

1. Development of agriculture.-Have you thought the agricultural sector, which consists of agriculture, proper and other Allied activities such as dying, animal husbandry, poultry, etc, is completely managed by private enterprise.

2. Development of trade.- Both wholesale and retail business has always been in the private sector because the trading services can be best rendered by private businessmen. 

3. Development of small scale and cottage industries.-Small and cottage industries in India are in the private sector and they have an important role to play in industrial development. They are particularly suited for the utilization of local employment opportunities as they are labour-intensive.

4. Contribution to GNP.And employment potential.-The private sector contributes 75% of the net domestic products. That dominance of the private sector is so overwhelming that 90% of the population is working in it.Thus, the private sector has been assigned an important role in India and it has exhibited its inherent strength and superiority.

Limitations and weakness of the private sector:

Emphasis on non-priority industry.-The private corporate sector helped in the expansion of consumer goods industries having low Priority such as man-made fibers, perfumes and cosmetics, air conditioners, refrigerators, TV's, etc. 

1. Emergency of monopoly power and concentration.-Whether the rapid expansion of the economy, some of the industrial houses which had existed and flourished even before independence were able to take advantage of all the facilities provided by the government and acquire monopolistic power. 

2. Industrial disputes.-The Prime Minister is plagued by poor industrial relations and valuable man days lost due to strikes and look.and lock outs since independence These disputesHamper the smooth progress of the industries. 

 Joint sector.-

The joint sector represents a new ideology of industrial management. The concept of the joint sector is a compromise between the alternatives of total nationalization and free enterprise economy. 

1. The joint sector is a form of partnership between the private sector and the government, and its ownership and control are effectively shared between public sector agencies and private groups on the other. The concept of joint sector refers to a new undertaking in which the state also holds the equity and controls the management of the company along with the private collaborator. 
2. Central government through any of the administrative ministries may set up new companies jointly with private partners involving substantial equity participation by both partners. 
3. The state government or their industrial development corporations may set up new enterprises jointly with private partners involving equity participation by both parties. 
4. Public financial institutions may, through equity participation and conversion of debt into equity, transform enterprises, promoted by private entrepreneurs into joint sector companies. 
5. The existing public sector companies may be transformed into joint sector enterprises through the sale of equity shares to private entrepreneurs or to the general public.

Role of the joint sector:

Curbing the Concentration of economic power.-government participation in the ownership and management of enterprises jointly with the private entrepreneurs could be an effective means for controlling monopoly concentration of economic power and business malpractices.

1.Social control over industry.-Joint sector is a tool for social control over industry without resorting to outright nationalization.

2.Acceleration of industrial growth-My.Providing public support and patronage, the joint sector may encourage small and medium entrepreneurs, help them to mobilize resources to procure machinery and equipment and.Build up confidence to face the uncertainties of modern business.

3.Balanced regional development.-By a process of spending projects to different regions with due regard to the resource and dominant pattern, and with linkage and spread effect, joint sector projects have.Been expected to promote a balanced development to the various regions in our state. 

4.Mobilization of resources-The state investment in joint sector projects encourage the private entrepreneurs as well as local and other institutional savers to invest under those mobiliz local savings of a sizable magnitude.

5.Extension of public control.-The joint sector will enable the government to enter the highly profitable lines of industrial activity, reducing the dominant economic power of the large industrial houses.

6.alternative to public and private sectors-The main advantage of the joint sector is that it combines the febrile world points found in the public as well as the private sector and seeks to eliminate the negative points in both. 

Problem of the joint sector:

• The following three problems are specific to the joint sector, in addition to other problems common to all industrial activity, be it in the public, private or the joint sector.
• There is a problem of management and control domination of the government and private partners.
• The joint sector enable private entrepreneurs to promote large projects with less of equity participation.
• The government tries to commit, commit for public accountability and auditing, whereas the private entrepreneurs try to motivate commercial profitability and.This controversy leads to problems. 

B)Large scale industry & small scale industry:

LARGE SCALE INDUSTRY

The basis of distinction between the large scale medium.Scale and small scale industry is generally the size, capital, resources and labour force of the individual unit. The largeness in the scale of production of large scale industry is inevitably associated with certain other features. Capital requirements are large. The finance is done through organizations like the joint-stock company. These organizations make it possible for them to draw upon the source of many, such as through the scale of shares, debentures, etc. The work in these industries is on a permanent basis.In India, largest scale industries are those with capital investment larger than specified for small scale industries. 

Role or importance or relevance of large scale industries:

1.Four big push to development-Industry have been given a key role in the development strategy of the country. As per the theory of big push, large investments in many such industries jerk the economy from the low level of equilibrium. 

2.For strengthening the economic base.-Another equally important consideration favouring large scale industries is the need to set up certain basic and capital goods industries which cannot be realized in the context of.Small scale operations of small industries. 

3.For raising General level of productivity.-With massive investments in large scale industries, the capital per had is very large. This raises the productivity per head in a big way, making it possible to pay high wages.Please let's do the rise of average income with the modernization of agriculture. 

4.For mass production and cost reduction.-Large scale industries unable goods to be produced on a mass scale and at a reduced cost, putting the goods within the reach of many as also strengthening.The competitive Powered in the export market.

Problems of large scale industries.:

1.Under used capacity.-The first problem that faces these.Industries is the non use of a large part of their capacity.Since most of these industries are capital investment intensive, under utilization of capacity implies growth wastage of precious capital resources. 

2.Relation with the small and cottage industries-As such, while the policy towards small industry has been positive, restrictions are led on large industries. 

3.PrivateMonopoly.-A matter of serious concern is the emergency of monopoly power in case of large scale industries belonging to the private sector.Monopolies are Associated with many evils such as restrictions of output,  charging higher prices, making undue profits, exploitations of consumers, misdirection of resources, etc

4.Obsolete machines and technologies.-Acute a number of large scale industries, in particular old industries like cotton, textiles.Continue to use obsolete machinery and old technology.

5.Expansion in critical areas.-There is also the need to expand these industries in critical areas.One such area is that supplies infrastructural supplies are like power, transport, etc.lack of.These facilities have hampered the growth it is necessary.To speed up the investment in this field. 

6.Foreign trade-Large scale industry requires technical know how and it has to be imported.The produced Being exported to other countries. The restrictions on exports by other countries creates the problem of the international market.

Small scale industries. 

Industries are broadly divided as large scale and small scale industries on the basis of the size, capital resources and labor force of the individual unit. The small scale industries include the cottage of village industry. Small scale industries were defined by the government as those unit which employed less than 50 workers while using power, or less than 100 parkers without using power. 

The difference between the small scale and cottage.[Or Village.]Industries are basically two:

By small scale, industries are mainly located in urban centers as separate establishments. The cottage industries are generally associated with agriculture. 

While a small scale industries produce good with particularly or wholly mechanized equipment employing outside labour, the cottage industries involve operation mostly by hand which.i carried on primarily with the help of the member of the family. Cottage Industries are hand spinning, hand loom weaving, toy making, rope making, woodwork etc. The model is small scale industries include tiny units and power looms. Modern small scale industries are used, mostly power operated appliances and mechanicals have some technology sophistication and a general located close to or in the urban areas. 

the essential features of small scale and cottage industries are as follows:

• Comparatively small investment of capital is required.
• They provide employment to a large number of persons.They are labor intensive.
• Personal supervision and management is possible.
• The smallest scale units are run as sole proprietorship or as partnership.
• They enjoy many concessions and incentives from the government

Role of cottage and small scale industries in the Indian economy.

Capital saving- Small scale industries need smaller amount of capital as they require tools and small machinery. They make possible economies in the use of capital.

Better distribution of income and wealth- They enable people living in different parts of the country to increase their income and standard of living.they checked the evils of urbanization and localization.

Mobilization of entrepreneurial skill- A number of entrepreneurs are spread over small towns and villages of the country.Small scale industry provides industrial experience and serves as a training ground for a large number of small scale managers.

Ancillary to large scale industry.- Small scale industry support the large scale industries in two ways.:

• Small industries may manufacture small parts such as nuts and bolts, steel plates, etc.
• Small scale units may convert the Sami-products of large scale industries into finished goods such as agricultural implements and household utensils.

Import light.- Small scale industries are import light, that is they use a relatively low proportion of imported equipment and materials as compared with the total amount of capital used in them.

A low import intensity in capital structure of the small scale industries reduces the need for foreign exchange earnings.

Problems of small scale industries:

Outdated techniques of production- Almost all the small industrial units producing traditional goods have been using old and outmoded Machinery tools and implements.The reason for this is the lack of education of our artisans and their poor economic conditions. 

Lack of finance.-The scarcity of finance and credit is the main obstacle In the development of small scale units.The capital base of the small industrial units is usually very weak since they generally have partnership or single ownership.They are all funds are limited and they have no credit worthiness to get enough finance from the credit market.Normally they depend upon the money-lenders from whom they borrow, but the rate of interest they have to pay is quite high. Because of their poor economic conditions, the artists are forced to dispose of their products at whatever price they may fetch.This is known as distress scale.

Difficulties in getting machinery and raw materials.-Small establishments find difficulty in getting machinery and raw material due to their poor financial conditions.The non availability of raw materials forces small units to stop productions.

poor marketing and transport facilities.- The small industrial units find difficulty in marketing their products.Problem of marketing becomes all the more difficult because of the difficult transport position in the rural areas. there is inadequate market information and the small producers may not know the type of things required by the customer. 

Quotation from large scale units and imported articles- In some lines of production small scale units Co exists with large units.The latter have many advantages of production and marketing flowing from their large size.

Power shortage and frequent power cuts.-The progress of electrification has not only been slow and halting, but in recent years power shortage and frequent power cuts have played havoc with the small scale industries. 

Older designs-Another great defect of most of our cottage and small scale industries, particularly of our handicrafts.

High taxation- The products of small scale units are heavily texted by different governments.

Suggestion for improvement of small scale industrial units:

1. Making such financial limit binding on the financial agencies.
2. Legislation for loan recovery producers such that the District Industry Center will also have a legal status in recovering the loans sanctioned by the banks and others.Besides the latter slides to restore to codes of law.
3. Creation of a strong base to make all government purchases through small industries alone.
4. Liberalized soft loan by the government to meet seed money of small industries at the District Industry Centre’s level.
5. Equitable supply of all raw materials to small industry through the District Industry Center’s godowns only.
6. Coordination of relevant research and development to improve the equality of goods with new design.
7. The government should supply electricity continuously at cheap rates.

C)Meaning of capital formation,Credit creation and role of banking system:

A)CAPITAL FORMATION:

• Capita includes all forms of reproductive goods as physical plants and stock of equipment constructions and the producers, inventories of raw materials and semi finished and finished goods that are used directly or indirectly in the production of a large volume of output. 
• There are concepts of capital formation, gross capital formation and net capital formation.The gross capital formation includes all expenditure incurred in increasing the capital stock.The net capital formation is measured after allowances are made for depreciation, obsolescence and damage to fixed capital. 
• Measurement of capital formation.- The measurement of the rate of capital formation in an economy is considered difficult owing to statistical errors.
•  Four methods are adopted for measuring capital formation:
• Capital formation represents an estimate of the accumulation of funds in a given period.This estimate is made of savings or the difference between production and consumption.This difference is executed to investment on the exception that savings are equal to investment.
• To calculate the expenditure for machinery, equipment, buildings, other constructions and works undertaken by individual enterprises.
• Estimation of capital assets has to be made at the beginning and at the end of every year.Any additions to this value after dedications are made for depreciation, obsolescence and changes in prices is assumed to represent net first capital function. 
• Capital formation is measured in terms of domestic production plus imports of capital goods less those other than dwellings sold or exported. 

Role of capital formation:

• The process of economic growth and capital accumulation are closely interconnected.Capital Formation plays a vital role in determining the level and rate of growth of national income.The rate of economic growth is a function of the rate of capital formation. Per capita incomes are higher in countries employing a large amount of capital per worker. The relationship between capital formation and economic growth is positive. This close relationship between capital growth and income growth makes the concept of capital formation more significant in any program of planned development. 
• A high rate of capital formation usually accompanies a rapid growth in productivity and income. If the capital formation takes the form of house buildings or addition to liquid stock, it is unlikely to add much perceptibility to productivity. 
• If incomes are growing fast, investment opportunities are likely to expand fast so that growth in income carries with it capital formation if capital formation does not respond.Its failure to do so will certainly act as a drag on the expansion of output. 
• Capital accumulation plays an important role in the creation of employment opportunities in the country.To produce capital goods and later to use these machines for producing further goals, more men had to be employed.
• Capital accumulation enables the producers of products with less costs.With large scale production, goods are available at low prices and there will be a wide market.
• Capital accumulation enriches productivity. The raise in productivity leads to higher wages for workers and welfare of the public will be enhanced. 

Reasons for low rate of capital formation in India:

Low Income.- Large savings are essential for capital formation and savings depend upon the size of income. They have absolutely no saving potential. Almost the entire income is spent on consumption.Thus, savings is not possible and the rate of capital formation remains low.

Demographic reasons.- Demographic features keep the rate of capital formation at a low level.The growth rate of population is very high.The per capita income is low.A large percentage of children in the total population entails a heavy burden on the parents and they are unable to save for capital formation. 

Low productivity.- Since the level of productivity is very low in India the income of the workers is very low hence saving and capital formation are also low.

Equalities in income distributions.- Large savings are possible only in the case of higher income group.In India, the high income group is very less. 

Lack of capital equipment.-Capital equipment in India remains law. Due to the shortage of capital, it is not possible to replace the existing capital equipment in case of depreciation. 

High level of Taxation- The high level of taxation, especially direct taxation has also been producing adverse effect on saving and capital formation. This is true especially in the case of middle classes. 

Human capital formation in India:

• The process of human capital formation implies the development of abilities and skills of people of an under-developed country. Capital means people as a capital asset, which yields a stream of economic benefits over their working lives. Expenditure on education and health, can therefore regarded as investment in human capital, because this implies a better quality of
• human beings, increases their adaptability to the changing requirements of the economy and in many cases lengthens their working lives. All these result in greater productivity and lead to greater production.In this respect, human capital is like material capital.
• The process of human resource development requires a long period policy because skill formation is a time consuming process.
• Process of human capital formation has to be correlated to the process of physical capital formation.
• It is difficult to separate investment in human capital from other forms of investment.How many types of expenditure which have relevance to various form of investment.We may district investment in human capital to,
• Education which includes general education and technical education. 
• Health, which includes healthcare, service, medical education, hospital, families welfare, etc. The importance of these items for improving the quality of Human capital needs no stressing.While education, general, technical and medical improves the level of understanding, it also adds to the capacity of human stock to produce more.Expenditure on items like healthcare, family welfare, etc. increases the physical and mental efficiency of the people. 

B)Credit creation:

• Demand deposits are an important constituent of money supply, and the expansion of demand means the extensions of money supply. The entire structure of banking is based on credit.Credit basically means getting the purchasing power now and promising to pay at some time in the future.Bank Credit means bank loans and advances.
• Abang keeps a certain part of its deposits as a minimum reserve to meet the demands of its dispositors and loan  on the remaining to an income.The loan is credited to the account of the borrower .Every bank loan.creates an equivalent deposit in the bank.Therefore, credited creation means expansion of bank deposits.
• The two most important aspects of credit creation are:
• Liquidity- The bank must pay cash to its depositor, Thurs, when they exercise their right to demand cash against their deposits. 
• Profitability-Banks are profit driven enterprises.Therefore, a bank must grant loans in a manner which earns higher interest than what it pays on its deposits.
• The bank's credit creation process is based on the assumption that during any time interval, only a fraction of its customers genuinely need cash. Also, the bank assumes that all its consumers would not turn up demanding cash against their deposits at one Point in time. 
• 
  
• Formula for determining the credit creation.
• total credit creation = Original.Deposit x Credit multiplier coefficient
• Where, credit multiplier coefficient = 1/r
• r = Cash reserve requirement, also known as cash reserve ratio.[CRR.] 
• Let's assume that the bank requires to maintain a CR of 20%.
• If a person [person A] Deposits.₹1000 with the bank, then the bank keeps only ₹200 in the cash reserve and lends the remaining 800 to another person [person B].They open a credit account in the borrower's name for the same.
• Similarly, the bank keeps 20% of Rupees 800[i.e.Rupees 160.] add advances the remaining rupees 640 to person C.
• Further, the bank keeps 20% of rupees 640.[i.e.Rupees 128.]Add advanced remaining Rupees 512 two percent D. 
• This process continues until the initial primary deposit of rupees 1000 and the initial additional reserves of rupees it under lead to additional or derivative deposits of rupees 4000.[800+640+512+...]
• Adding the initial deposits we get total deposits of Rupees 5000. In this case the credit multiplier is 5 [Reciprocal of the CRR.] andThe credit creation is five times the initial access reserves of Rupees 800.
• The bank has many banks in it cannot grant loans in access of the cash it creates. When are bank creates a derivative deposit, it loses cash to other banks. 
• The loss of deposit of one bank is the gain of deposit for some other bank. This transfer of cash within the banking system creates primary deposits and increases the possibility for further the creation of derivative deposits. Here is an illustration to explain this process better.
• As explained above, the initial deposit of Rupees 1000 with bank a leads to a. Creation of total deposits of Rupees 5000. 

C)BANKING SYSTEM :

Functions of central bank:

As the Central Bank of the country, the Reserve Bank of India performs the following functions.:

1. Currency authority.
2. Banker to the government.
3. Bankers Bank and supervisor.
4. Controllers of money supply and credit.
5. Custodian of foreign exchange reserves.

1.Currency authority.- Central Bank has the sole authority for issue of currency in the country.In India, Reserve Bank of India.[RBI] has the sole right of issuing paper currency notes.[₹1 notes and coins which are issued by the Ministry of Finance.] 

2.Banker to the government.- The Reserve Bank of India Acts as a banker, agent and a financial advisor to the central government and all the state governments.[Except that of Jammu and Kashmir.]

• It maintains a current account for keeping their cash balances.
• It accepts receipts and makes payments for the government and carries out exchange remittance and other banking operations. 
• It also gives loans and advances to the government for temporary periods.The government borrows money by selling treasury bills to the Central bank.

3.Bankers Bank and supervisor.- There are a number of commercial banks in a country.There should be some agency to regulate and supervise their proper functioning.The central bank.[RBI.]Acts as the banker to other banks.In this sense, it bears the same relationship with Commercial Bank as the latter maintains with the general public. 

4.Controller of money supply and credit.- Due to economic fluctuations, the central bank, that is RBI controls the money supply and credit in the best interest of the economy.As RBI has the sole monopoly in currency issue, it can control credit and supply of money.For this, RBI makes use of following methods of credit control.

1.Repo.[Repurchase.] rates.- Repo rate is the rate at which the central Bank of a country.[RBI in case of India.]Lends money to commercial banks to meet their short term needs.

2.Bank rate.[or discount rate.]- Bank rate is the rate at which the Central Bank of a country lends money to commercial banks to meet their long term needs.

3.Open market operations.- Open market operations.[OMO] Refers to buying and selling to government securities by the Central Bank from to the public and commercial banks.

#Sale of securities by the Central Bank reduces the reserves of commercial banks.It adversely affects the bank's ability to create credit and therefore decrease the money supply in the economy.

#Purchase of securities by central government increases the reserves and raises the banks ability to give credit.

4.Legal reserve requirements.[Variable reserve ratio method.]- According to legal research requirements, commercial banks are obligated.To maintain reserves.It is a very quick and direct method for controlling the credit creating power of commercial banks.

#Cash reserve ratio.[CRR]- It refers to the minimum percentage of nut demand and time liabilities to be caught by commercial banks with the central bank.

#Statutory Liquidity ratio.[SLR]- It refers to the minimum percentage of net demand and time liabilities which commercial banks are required to maintain with themselves.

5.Margin requirements.-Margin is the difference between the amount of loan and market value of the security offered by the borrower against the loan.

5.Custodian of foreign exchange reserves.-The central bank also acts as the custodian of the country's stock of gold and reserves of foreign exchange.This function enables the central bank to exercise too reasonable control on foreign exchange.According to regulation of foreign exchange, all foreign exchange transactions must be routed through RBI. 

#Role and importance of commercial banks.:

• The functions of commercial banks explain their importance in the economic development of a country.Banks help in accelerating the economic growth of a country in the following ways.:
• Accelerating the rate of capital formation.- Commercial Banks encourage. the habit of thrift and mobilize the saving of people.These savings are effectively allocated among the ultimate users of funds, that is, investors for productivity investment.So savings of people result in capital formation which forms the basis of Economic development.
• Provision of finance and credit.- Commercial banks are a very important source of finance and credit for Trade and Industry.The activities of commercial banks are not only confined to domestic trade and commerce, but extend to foreign trade also.
• Developing entrepreneurships.- Banks promote entrepreneurships by underwriting the shares of new and existing companies and granting assistance in promoting new ventures or finance promotional activities.Banks finance sick.[Loss making.]Industries for making them viable units.
• Promoting balanced regional development.- Commercial banks provide credit facilities to rural people by opening branches in the backward areas.The funds collected in developed regions may be channelized for investments in the underdeveloped regions of the country.In this way they bring about more balanced regional development.
• Help to consumers.- Commercial Banks advance credit for purchase of durable consumer items like bicycles, TV, refrigerator, etc. Which are out of reach for some consumers due to their Limited paying capacity. In this way, banks help in creating the demand for such consumer goods.