When the government cuts down the taxation rate then it faces budget deficit (expenditure over the revenue ); which is financed by borrowings from RBI. Then in future the government has to repay the loan to RBI . For this government will raise tax in future. Thus today fall in taxes will lead to rise tax in future; So we can conclude government debt is equivalent to future taxes.

Now the question is – will this process effect the citizens of the country and their consumption?
The answer is No; because consumers are forward looking; they know that tax cut today will lead to rise in the tax rate in future; thus the money today they have saved will be used to pay taxes in future hence consumption remain unchanged.

But it is not true for those people who have binding constraint because for them current income is more important than future because bank loans are not available to them; so they will consume today whatever amount they saves from the reduction in taxes thus there future consumption will be low but it was an exceptional case.

Overall we can say that reduction in taxes leads to tax rise in future ” Ricardian Equivalence “; thus consumption doesn’t get affected because people are more concern about their permanent income not on their temporary income.

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India recognises the significance of human capital formation in the context of economic growth .India is developing into a knowledge economy but there are serious problems in the process of human capital formation :
1. Rising population : Population is rising rapidly and affects the quality of human capital .It reduces per head availability of existing facilities like sanitation ,employment ,drainage ,water system, housing,hospitals ,education ,food supply and etc .
2.Brain drain : people born here,educated here and providing services to other countries by migrating themselves there,causes brain drain .
3…Insufficient Manpower planning:There is insufficient manpower planning and only meagre efforts have been made either to raise the standard of education at different stages ,or to maintain the demand and supply of technical labour force.As a result ,with its present pattern of education expansion,and india is facing one of the most explosive problems of discontent and frustration ,that of graduate unemployment.
4.Insufficient On the job training; Agriculture is the backbone of underdeveloped countries,but less attention is paid on agricultural development and there is hardly any provision for ‘on the job training programme’in agriculture.Little is done to educate farmers to use modern agricultural technology. The insufficient supply of qualified and trained agricultural technologists is responsible for a meagre attention to agricultural development and human capital formation .
5.Low academic standards; To speed higher education we have been opening many universities without caring for their academic standards ..This tends to lower the efficiency of our graduates and post graduates employed in both public and private sectors of economy.

These are the problems faced by human capital formation in India.

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World trade organisation is expected to play an important role in the context of globalisation of world economies. It is supposed to promote free trade in the international market by reducing tariff barriers and by removing non tariff barriers. It is focusing on the competition in the international market and free access to markets across different countries of the world.It is facilitating bilateral as well as multilateral trade agreements.
Impact of WTO on the Indian economy:
1.It is expected that WTO will offer greater export opportunities to the Indian economy.Accordingly ,our share in international trade is expected to increase in future.
2.WTO promises an end to the quota regime imposed by developed countries on the import of textiles and clothing from the less developed countries like India .
3.Due to agreed reduction in trade barriers and reduction in subsidies to the domestic producers of agricultural goods in the developed countries ,prices of these goods are expected to rise in the international market .This is expected to accelerate India’s exports of agricultural products.

With greater stability of the international trading system through WTO,India is expecting a marked deadline in dumping practice adopted by the developed nations of the world .
WTO agreement is offering only an asymmetric treatment to capital and labour market .WTO focuses on the free movement of capital across different nations,not on the free movement of labour ,while both labour and capital are commodities of factor market.Certainly free flow of capital fosters the commercial interests of MNCs of the developed nations.They can find market in less developed countries .But the free flow of labour which would have fostered the commercial interest of less developed countries like India is not allowed by WTO.Accordingly ,Indian labour does not find free access to the labour markets of developed countries.

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Technology and imperfect competition.

Ideas are nonrivalous in nature which leads to imperfect competition with increasing returns .
As ideas are nonrivalours ,means once they produce it usage by one doesn’t effects the other one and are partially excludable,means once the ideas are produced it can be used by others also .
As ideas are nonrivalours ,to produce ideas once ,it requires the fixed cost and other are the dublication so production function where it the goods have fixed cost and constant marginal cost .
In perfect competition price is equals to marginal cost there is efficiency ,but in imperfect competition price is greater than marginal cost,is it efficient ?
The answer is yes , because in perfect competition firm earn normal profit ,but in imperfect competition firms earn profit and thus take initiative to produce ideas with this profit because ideas require fixed cost to produce once .Thus if firm will not earn the extra profit ,it will not take any initiative to produce ideas and there will be no technological progress and the economy will be stagnant and backward .
Thus imperfect competition is necessary to boost technological progress and for the development of the economy.

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The Barro- Ricardo Hypothesis claims that changes in taxes would be precisely offset by an opposite change in private saving .The debate centres around an argument originally noted and rejected by David Ricardo and which was revived by Robert Barrio in 1974.
Suppose the budget is balanced initially ,and the government cut taxes ,then there is budget deficiet, financed by borrowing .The debt that is issued today must be retired next year or in some future year ,along with the interest that it carries. To repay the debt government will have to raise taxes in the future .Thus a tax cut toady means a tax increase in future.
Hence changes in taxes should have no effect on consumption because permanent income is unaffected by this jiggling of taxes.
Thus consumption is unaffected because of the assumption that consumers have far sighted. Thus consumer save today from the tax cut and decrease in government saving by tax cut will be offset by this private saving and income remain unaffected.
But it was rejected by Ricardo himself because of the problem that consumers are short sighted they don’t predict future exactly so tax cut today leads to increase their consumption The second reason was liquidity constraints where borrowing is not allowed thus consumer cannot buy if his income is less than consumption thus tax cut today will help him to increase his consumption with the given income.Third reason was that people thought that taxes will rise in future thus burden will be on future generation to pay taxes thus today generation need not to worry. This concept is explained by Ricardo and improvised by Barrio where he said that present generation is more concerned for the future generation that’s why they left bequests so that after their death there will b no burden on future generation thus it is called “Ricardo-Barrio ” hypothesis.

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Economy is affected by many things .Lets look out the effect of increase in saving rate in economy.

The economy is assumed to begin in a steady state with saving rate (s) and capital stock (k).When the savin g rate increases from s to s1 .At the initial saving rate S and the initial capital K ,the amount of investment just offsets the amount of depreciation .Immediately after the saving rate rises,investment is higher,but the capital stock and depreciation are unchanged.Therefore ,investment exceeds depreciation .The capital stock will gradually rise until the economy reaches the new steady state which has a capital stock and a higher level of output than the old steady state.
The saving rate is a key determinant of the steady state capital stock. If saving rate is high ,the economy will have a large capital stock and high level of output in the steady state .If the saving rate is low ,the economy will have a small capital stock and low level of output in the steady state.
Higher saving leads to faster growth but only temporarily. An increase in the rate of saving raises growth only until the economy reaches the new steady state.If the economy maintains a high saving rate,it will maintain a high rate of faster growth forever.Policies that alter the steady -state growth rate of income per person are said to have a growth effect.By contrast higher saving is said to have level effect,because only the level of income per – not its growth rate.

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Investment of a firm is depend on 2 factors I.e 1 is output and 2 is rental cost .There is positive relation between output and investment .Higher the output higher will be the investment and the relation between investment and rental cost is negative.
As the investing of a firm is dependent on rental cost ,rental cost is affected by many factors.Some of the factors are :
1. Rate of interest : higher will be the real interest rate , higher will be the rental cost thus finally investment of a firm will be low.It shows the negative relation between rental cost and rate of interest and always considered real interest rate rather than nominal interest rate.
2. Depreciation : Higher will be the depreciation ,it will increase the cost Because of increase in tear and wear and finally leads to low investing by firms.
3. Taxes : Higher will be the  tax credit ,lower will be the rental cost because tax credit will be provided to the firms by the government which convince the firms to take initiative of increasing investment because from this rental cost will be reduce.
4.Price of shares: Higher will be the price of share ,firm will invest more by selling only few of its shares .Thus booming market leads to increase in investment.

Investment of a firm in inventory is also affected by whether the inventory is anticipated or unanticipated ,higher anticipated inventory investment leads to invest more and increase the aggregate demand but unanticipated investment leads to reduce the investment and finally to the aggregate demand
Thus increase in investment of firm increase the AD (aggregate demand) and also leads to the growth and development of economy.

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RBI can use its three instruments to control money supply (Monetary policy)i.e open market operations(by borrowing and selling bonds), the discount rate (the rate at which bonds are buy and sell),changes in reserve requirements (which is maintained by commercial banks) then why its control imprecise ?
Because of these reasons ;
1. Multiple definition of money – There are many types of financial assets included in M2 that are not included in M1 .Both saving deposits and time deposits are included in M2 but excluded from M1 . An increase in the attractiveness of these deposits relative to transactions accounts ,for eg would raise the level of M2 relative to M1 .In this case RBI would not be able to precisely control M1 and M2 simultaneously.

2. Firms and households choose the amount of currency : RBI controls two elements in the money supply ,highpowered money and the reserve ratio .It does not control the ratio of currency to deposits ,which is controlled by firms and households.If the RBI cannot predict precisely when the ratio of currency to deposits will change ,it cannot precisely control the money supply.

3.Other factors : In money supply equation it does not take into account that transaction accounts have reserve requirements while other accounts do not.And since money market mutual funds are not actually deposits ,they are also free from reserve requirements .A consequence of these differing reserve requirement ratios is that shift to funds across accounts will change the average reserve ratio.

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Theory of money demand – Baumol

In the early 1950s ,William j. Baumol of Princeton and Newyork University demonstrated that the transaction demand for money depends on interest rate.The funds that individual hold for transactions to bridge the interval between the receipt of income and its disbursement can be replaced either in currency which is assumed by earning zero interest on that or in saving deposits.
higher the interest rate higher will be the money demand .BAumol analysis that money holding decision of a hypothetical individual who receives income at specified intervals but spend it steadily between paydays .
When the consumer decide how much to consume and how much to save he considered the cost .Thus the cost of holding money is the interest forgone on that amount and the interest forgone will be r (interest) times the amount of cash holding divide by 2 and benefit of holding money is consumer can save himself from too many trips to bank and also from the broker’s fees .On the other hand which was considered as the cost of saving in bank accounts.
Thus to decide how much to consume and how much to save consumer have to minimise both these costs and this leads to the conclusion that higher will be the interest rate,higher will be the money demand and people will save more in bank accounts and higher will be the broker’s fee people will tend to hold more cash in hand .
The smaller the withdrawals mean that average cash holdings are smaller .The extra broker’s fees incurred by going bank more frequently are compensated for by the extra interest earned on larger savings account balances at the higher interest rate .

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Some potential effects of population growth. Here we consider two- one emphasizing the interaction of population with natural resources; the other emphasizing the interaction of population with technology.

Malthus began by noticing that “food is necessary to the existence of man” and that “the passion between the sexes is necessary and will remain nearly in its present state.” He concluded that “the power of population is infinitely greater than the power in the earth to produce subsistence for man.” According to Malthus; the only check on population growth “misery and vice.” Attempts by charities or governments to alleviate poverty were counterproductive; he argued; because they merely allowed the poor to have more children; placing even greater strains on society’s productive capabilities.

Malthus failed to foresee that growth in mankind’s ingenuity would more than offset the effects of a larger population. Pesticides; fertilizers; mechanized farm equipment; new crop varieties; and other technological advances that Malthus never imagined have allowed each farmer to feed ever greater numbers of people. Even with more mouths to feed; fewer farmers are necessary because each farmer is so productive. Today; fewer than 2% of Americans work on farms; producing enough food to feed the nation and some excess to export as well.

There is now little reason to think that an ever expanding population will overwhelm food production and doom mankind to poverty.

The kremeriam model :
While Malthus saw population growth as a threat to rising living standards; economist Michael Kremer has suggested that world population growth is a key driver of advancing economic prosperity. If there are more people; Kremer argues; then there are more scientists; inventors; and engineers to contribute to innovation and technological progress.

If technological progress is more rapid when there are more people to discover things; then the more populous region should have experienced more rapid growth.

Kremer cocludes from this evidence that a large population is a prerequisite for technological advance. Thus of populatin increase there should also be increase in technology for the growth of economy otherwise it leads to low growth (poor economy).

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