Unit 2 - Lecture 2 To 3 - Economic Policies

BUSINESS ENVIRONMENT
PART 4 :
THE FINANCIAL SYSTEM
Chapter 22
MONETARY AND FISCAL POLICIES
Chapter 22
Monetary and Fiscal Policies
Topic & Learning Outcome

 Competition Act and Foreign Exchange Management Act
(FEMA), Monetary Policy/ Credit Policy, The 1997
Collapse of the Thai Baht: Case Study; Fiscal Policy,
Role and Functions of the Reserve Bank of India (RBI),
Union Budget 2020-21: Case Study
 Evaluate the measures announced in FEMA and credit
policy to cope with the changing regulations affecting
business and its profitability (CO2); Evaluate the
measures announced in fiscal policy to cope with the
changing regulations affecting business and its
profitability (CO2)
Business Environment
Himalaya Publishing House Francis Cherunilam
Chapter 22
Monetary Policy
 Monetary Policy refers to the use of instruments within the

control of the Central Bank to influence the level of
aggregate demand for goods and services or to influence
the trends in certain sectors of the economy.
Chapter 22
Measures of Money Stock
 A knowledge of the measures of money stock in an

economy would help us to understand monetary policy
better.
 The Reserve Bank of India employs four measures of
money stock, namely, M1, M2, M3 and M4.
Chapter 22
 M1: The measure of money stock designated by M1 is usually

described as the money supply.
 M2: M2 is M1 + Post Office Savings Bank Deposits.
 M3: M3 is M1 + Time Deposits with the banks. In other
words, M3 is money supply plus fixed deposits with the banks.
M3 is usually referred to as aggregate monetary resources.
 M4: M4 is M3 plus the total Post Office Deposits.
Chapter 22
Instruments of Monetary Policy
The instruments of monetary policy (methods of credit

control) may be broadly divided into:
 General (Quantitative) methods; and
 Selective (Quantitative) methods.
Chapter 22
General Credit Controls
 There are three general or quantitative instruments of

credit control, namely, the Bank Rate, Open Market
Operations and Variable Reserve Requirements.
Chapter 22
Bank Rate Policy
 The term Bank Rate refers to the minimum rate at which

the central bank provides financial accommodation to
commercial banks in the discharge of its function as the
lender of the last resort.
Chapter 22
Variable Reserve Ratios
 The central bank has the power to vary this reserve

requirement; and the variation in the reserve requirements
affect the credit creating capacity of commercial banks.
Chapter 22
Selective Credit Regulation
 Selective and qualitative credit control refers to regulation

of credit for specific purposes or branches of economic
activity.
 The aim of selective controls is to discourage such forms
of activity as are considered to be relatively inessential or
less desirable.
Chapter 22
Fiscal Policy
 Fiscal Policy is that part of Government policy which is

concerned with raising revenue through taxation and other
means and deciding on the level and pattern of
expenditure.
 The fiscal policy operates through the budget.
Chapter 22
The Union Budget
 The Constitution of India provides that –

1. No tax can be levied or collected except by authority of
law.
2. No expenditure can be incurred for public funds except in
the manner provided in the Constitution.
3. The executive authorities must spend public money only
in the manner sanctioned by Parliament in the case of the
Union and by the State legislature in the case of a State.
Chapter 22
State Budgets
 Like the Union Government, State Governments, too, have

their own budgets. Estimates of receipts and expenditure
are presented by the State Governments to their
legislatures before the beginning of the financial year and
legislative sanction of expenditure is secured through
similar procedure.
Chapter 22
Importance of The Budget

 There is no other Government measure that affects the
whole economy as the Budget. No wonder all sections of
the people await the annual Budget with mixed feelings-
anxiety, fear and hope. The endeavour of the Finance
Minister is to present a Budget which gives maximum
support to forces that can move the country forward on the
path of growth with stability and social justice. The
Budget should set the stage for the achievement of
economic and social goals.
Chapter 22
Quiz
 Analyse the difference between T-Bill and Government Securities.

 (a) Short-term and medium-term borrowing financial instruments
respectively?
 (b) Short-term and long-term borrowing financial instruments
respectively?
 (c) Short-term and long-term borrowing financial instruments of
Scheduled Commercial Banks respectively?
 (d) Short-term and long-term borrowing financial instruments of
Government respectively?
 (e) Short-term and medium-term borrowing financial instruments of
Government respectively?
Chapter 22
Question
 How repo rate changes by the RBI (Reserve Bank of

India) impacts business?
 What are the differences between CRR (Cash Reserve

Ratio) and SLR (Statutory Liquidity Ratio)?
Chapter 22
Question
 What are different types of taxes? How changes in GST

(Goods and Services Tax) impacts business?

Unit 2 - Lecture 2 To 3 - Economic Policies

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BUSINESS ENVIRONMENT

Topic & Learning Outcome

 Monetary Policy refers to the use of instruments within the

Measures of Money Stock

 A knowledge of the measures of money stock in an

 M1: The measure of money stock designated by M1 is usually

Instruments of Monetary Policy

The instruments of monetary policy (methods of credit

General Credit Controls

 There are three general or quantitative instruments of

Bank Rate Policy

 The term Bank Rate refers to the minimum rate at which

Variable Reserve Ratios

 The central bank has the power to vary this reserve

Selective Credit Regulation

 Selective and qualitative credit control refers to regulation

 Fiscal Policy is that part of Government policy which is

The Union Budget

 The Constitution of India provides that –

 Like the Union Government, State Governments, too, have

Importance of The Budget

 Analyse the difference between T-Bill and Government Securities.

 How repo rate changes by the RBI (Reserve Bank of

 What are the differences between CRR (Cash Reserve

 What are different types of taxes? How changes in GST

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