Monetary & Fiscal Policy

Module - 5

12/14/2008

Surana College PG Centre

1

Monetary Policy
Extent of Money:  Monetary policy is a policy statement through which the central bank The sources of M3 are : ( RBI ) targets key Bank credits, Govt.’s set of indicators to currency liability to public , ensure price net foreign exchange stability in the reserves of banks. economy. Expansion of Money Supply:  These indicators Money supply in the economy include will be increased by RBI • Money supply through issue of currency, budgetary operations and ( M3) borrowings by govt. from foreign countries. • Interest rate • Inflation Growth in money supply should 12/14/2008 Surana College PG Centre  This policy is be more than the growth in 2
The central bank measures the extent of money & credit available in the economy using the indices like M0,M1,M2,M3.

Monetary Policy
Contraction of Money: Bank Rate:
The rate at which RBI lends Unlimited supply of money results in money to other banks . hyper-inflation, which hits all sections of economy. Hence RBI  During Inflation time RBI will use ‘Credit Control Measures’ to increase the bank rate . This reduce the money supply. will affect the borrowers. Credit Control Measures are: During the period of falling 1. General controls prices this rate will be 2. Selective controls reduced. General controls are: Cash Reserve • Bank Rate, Requirement ( CRR ): • Cash Reserve Requirement , • Statutory Liquidity Ratio , and • Refinance policy. All commercial banks have • Open market Operations to keep certain • Special facility to some percentage of demand & groups time deposits with RBI. • Liberalisation of Bill Market This is called CRR. Scheme  During Inflation time RBI Selective Controls are: will increase the CRR . • Insisting minimum margin for lending against certain This will reduce the fund securities available for issuing • 12/14/2008 ceiling on certainSurana College PG Centre 3 Fixing credit. During the period credits

Monetary Policy
Statutory Liquidity Ratio ( SLR ):
All commercial banks in addition to CRR have to keep certain percentage of demand & Time deposits with RBI in the form of liquid assets like Cash , Gold or approved securities.

Bank Rate:
The rate at which RBI lends money to other banks .  During Inflation time RBI will increase the bank rate . This will affect the borrowers. During the period of falling prices this rate will be reduced.

Cash Reserve Requirement  It will be increased to reduce ( CRR ): the money supply & vice versa All commercial banks have to  Present rate is 30% keep certain percentage of Refinance Policy: demand & time deposits Based on the liquidity position with RBI. This is called CRR. of commercial banks RBI  During Inflation time RBI will provides fund . This is used increase the CRR . This will by RBI to control the credit reduce the fund available for issued by banks. issuing credit. During the Open market operations: period of falling prices this rate will be reduced. Based on the money supply in  Present rate is 9% the economy RBI will buy gold and securities from 12/14/2008 Surana College PG Centre 4 public to expand money

Monetary Policy
Special facilities to some groups:
RBI advise banks to liberally issue credit facility to Small scale industries, self employed etc. . This will increase money supply and vice versa to reduce the money supply

Commercialisation of Bill Market Scheme : Under this commercial banks get additional fund from RBI to advance credit further. This will increase money supply. Moral Suasion: Under moral suasion RBI issues letters to banks to exercise control over credit 12/14/2008 or advance against Surana College PG Centre particular commodity or

Objectives of Monetary Policy: 2. To reduce inflation by contracting money supply 3. To print new currency with a view to reduce the trade deficit 4. Boosting export to reduce huge external payment deficit.

5

Fiscal Policy
2. Taxation 3. Public Expenditure 4. Public Debt Taxation: 6. Direct Tax – Personal Income tax,Corporation tax,Inheritance tax,Wealth tax 2. Indirect tax – Excise duty, VAT, Customs duty,Sales tax  Fiscal policy is operated To modify the revenue the through Budget  Fiscal policy also called govt will increase/Decrease ‘Budgetary Policy’ tax 12/14/2008 Surana College PG Centre rate or tax base 6
Fiscal policy is the policy of government concerned with raising of revenue through taxation and other means and deciding on the level and pattern of expenditure Objectives of Fiscal Policy: 3. To accelerate rate of investment 4. Achieving rapid economic development 5. Achieving full employment 6. Promoting foreign trade 7. Establishing welfare state

• Instruments of Fiscal Policy

Fiscal Policy
• Instruments of Fiscal Policy 2. Taxation 3. Public Expenditure 4. Public Debt Public Expenditure: Rise in public expenditure will increase the standard of living Public expenditure is done through Budget The govt. will make following changes on Public expenditure Size of public expenditure Combination of expenditure Direction of expenditure
12/14/2008

Public Debt:

Surana College PG Centre

7

The Budget
Consolidated Fund – It contains all revenues received, loans raised and repayment of loans by the central Importance: govt  In India , the total budgetary - No money can be withdrawn except under the authority of expenditure of both Centre & parliament States is 50% of GDP - The estimate of expenditure from  It accelerates economic Consolidated Fund are place before development Parliament  Improves production in private - All withdrawals from this fund are sector passed as Finance Act seperately.  Improves income distribution Public Account – All the revenues not included in consolidated fund like  Promote export & import deposits, remittances, service funds substitution go in to this account. Union Budget- To withdraw money approval of parliament is not required The anticipated revenue & expenditure of Central govt. Contingency Fund – To meet unforseen expenditure , established  It is presented to Parliament on under Article 267(I) of Constitution the last day of February.  All receipts & disbursements are State BudgetThe anticipated revenue & expenditure kept under two headings of State & UTs govt. namely Placed before Legislature at the Consolidated Fund and begning of Financial year . It also contains Consolidated Fund, Public Account of India 12/14/2008 Surana College PG Centre Account & Contingency Fund 8 Public  These two accounts are formed
Budget means an estimate of Revenue and Expenditure

The Budget
Sources of Union Revenue Sources of State Revenue
Land revenue Tax on agriculture income Estate duty on agriculture land Taxes on land & buildings Taxes on liquor produced in India Taxes on entry of goods Tax on consumption or sale of electricity Tax on sale or purchase of goods except news paper Tax on advertisement other than news paper Tax on goods & passengers by road and inland water ways Tax on Surana College PG Centre 9 animal,boat,profession,vehic Income Tax Customs & Export Duties Corporation Tax Excise duties on tobacco & other goods manufactured in India Estate duty on property Taxes on Railway, air, Passenger goods Stamp duty on transactions in Stock exchange Taxes on sale or purchase of news paper & advertisement Tax not included in State list
12/14/2008

The Budget
Finance Commissions: Under the Constitution of India Finance Commission has to be constituted every five years to make necessary recommendations to President on 3. Modalities for distribution of tax between centre and state and among states 4. Principle for payment of Grant-inaids to states 5. Recommendation on continuation or not of the agreements between Centre & State 6. Recommend on any other isue referred toSurana College PG Centre it.

12/14/2008

10

Sign up to vote on this title
UsefulNot useful