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Monetary & Fiscal Policy

Module - 5

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Monetary Policy
Extent of Money:
The central bank measures the
 Monetary policy is a extent of money & credit
policy statement available in the economy
through which the using the indices like
central bank
( RBI ) targets key The sources of M3 are :
set of indicators to Bank credits, Govt.’s
currency liability to public ,
ensure price net foreign exchange
stability in the reserves of banks.
economy. Expansion of Money
 These indicators Supply:
include Money supply in the economy
will be increased by RBI
• Money supply through issue of currency,
( M3) budgetary operations and
borrowings by govt. from
• Interest rate foreign countries.
• Inflation
Growth in money supply should
 This policy is
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Monetary Policy
Contraction of Money: Bank Rate:
Unlimited supply of money results in The rate at which RBI lends
hyper-inflation, which hits all money to other banks .
sections of economy. Hence RBI  During Inflation time RBI will
use ‘Credit Control Measures’ to
reduce the money supply. increase the bank rate . This
Credit Control Measures are: will affect the borrowers.
1. General controls During the period of falling
2. Selective controls
prices this rate will be
General controls are:
• Bank Rate, Cash Reserve
• Cash Reserve Requirement , Requirement ( CRR ):
• 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.
Selective Controls are:  During Inflation time RBI
• Insisting minimum margin for will increase the CRR .
lending against certain This will reduce the fund
securities available for issuing
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Fixing ceiling on certain Surana College PG
During the period
Monetary Policy
Statutory Liquidity Ratio Bank Rate:
( SLR ): The rate at which RBI lends money
All commercial banks in addition to to other banks .
CRR have to keep certain  During Inflation time RBI will
percentage of demand & Time increase the bank rate . This will
deposits with RBI in the form of affect the borrowers. During
liquid assets like Cash , Gold or the period of falling prices this
approved securities. rate will be reduced.
 It will be increased to reduce Cash Reserve Requirement
the money supply & vice ( CRR ):
 Present rate is 30% All commercial banks have to
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
Based on the money supply in rate will be reduced.
the economy RBI will buy  Present rate is 9%
gold and securities from
public to expand money
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Monetary Policy
Special facilities to some Objectives of Monetary
groups: Policy:
RBI advise banks to liberally 2. To reduce inflation by
issue credit facility to Small contracting money supply
scale industries, self 3. To print new currency
employed etc. . This will with a view to reduce the
increase money supply and trade deficit
vice versa to reduce the
money supply 4. Boosting export to reduce
Commercialisation of Bill huge external payment
Market Scheme : deficit.
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 or advance against
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particular commodity or
Fiscal Policy
Fiscal policy is the policy of • Instruments of Fiscal
government concerned with
raising of revenue through Policy
taxation and other means 2. Taxation
and deciding on the level
and pattern of expenditure 3. Public Expenditure
Objectives of Fiscal Policy: 4. Public Debt
3. To accelerate rate of Taxation:
6. Direct Tax – Personal
4. Achieving rapid economic
Income tax,Corporation
5. Achieving full employment
tax,Inheritance tax,Wealth
6. Promoting foreign trade
7. Establishing welfare state 2. Indirect tax – Excise duty,
VAT, Customs duty,Sales
 Fiscal policy is operated tax
through Budget To modify the revenue the
 Fiscal policy also called govt will increase/Decrease
‘Budgetary Policy’
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Fiscal Policy
• Instruments of Fiscal Policy Public Debt:
2. Taxation
3. Public Expenditure
4. Public Debt
Public Expenditure:
Rise in public expenditure will
increase the standard of
Public expenditure is done
through Budget
The govt. will make following
changes on Public
Size of public expenditure
Combination of expenditure
Direction of expenditure
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The Budget
Budget means an estimate of Consolidated Fund – It contains all
Revenue and Expenditure revenues received, loans raised and
repayment of loans by the central
Importance: govt
 In India , the total budgetary - No money can be withdrawn
expenditure of both Centre & except under the authority of
States is 50% of GDP parliament
 It accelerates economic - The estimate of expenditure from
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
 Promote export & import included in consolidated fund like
deposits, remittances, service funds
substitution go in to this account.
Union Budget- - To withdraw money approval of
The anticipated revenue & parliament is not required
expenditure of Central govt. Contingency Fund – To meet
 It is presented to Parliament on unforseen expenditure , established
under Article 267(I) of Constitution
the last day of February.
 All receipts & disbursements are State Budget-
The anticipated revenue & expenditure
kept under two headings of State & UTs govt.
namely Placed before Legislature at the
Consolidated Fund and begning of Financial year .
Public Account of India It also contains Consolidated Fund,
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 These two accounts are formed 8
The Budget
Sources of Union Sources of State
Revenue Revenue
Income Tax Land revenue
Customs & Export Duties Tax on agriculture income
Corporation Tax Estate duty on agriculture land
Excise duties on tobacco & Taxes on land & buildings
other goods manufactured in Taxes on liquor produced in
India India
Estate duty on property Taxes on entry of goods
Taxes on Railway, air, Tax on consumption or sale of
Passenger goods electricity
Stamp duty on transactions in Tax on sale or purchase of
Stock exchange goods except news paper
Taxes on sale or purchase of Tax on advertisement other
news paper & advertisement than news paper
Tax not included in State list Tax on goods & passengers by
road and inland water ways
Tax on
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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-in-
aids to states
5. Recommendation on continuation or
not of the agreements between
Centre & State
6. Recommend on any other isue
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