MONETRY AND FISCAL POLICY

OF INDIA
 CONTENT

• MONETARY • UNION • FISCAL

POLICY BUDGET POLICY
 MONETRY POLICY
• Monetary policy is the process by which
monetary authority of a country, generally a
central bank controls the supply of money in
the economy by exercising its control over
interest rates in order to maintain price
stability and achieve high economic growth. in
India, the central monetary authority is
the RBI.
 MEASURE OF MONEY STOCK

• M1: Usually described as the money supply.

• M2:M1+Post office savings bank deposits.

• M3:M1+Time deposit with the bank

• M4:M3+Post office deposits.

 MONETARY POLICY AND MONETARY
SUPPLY

• Money supply comprises currency with the

public and demand deposits.
• Instruments of monetary policy

• General credit controls

• Bank rate policy

• Open market operations

 Statutory Liquidity Ratio

• Every financial institute have to maintain a

certain amount of liquid assets from their time
and demand liabilities with the RBI. These liquid
assets can be cash, precious metals, approved
securities like bonds etc.

• The ratio of the liquid assets to time and demand

liabilities is termed as Statutory Liquidity Ratio
There was a reduction from 38.5% to 25%.The
current SLR is 23%.
 Cash Reserve Ratio

• Cash Reserve Ratio is a certain percentage

of bank deposits which banks are required to
keep with RBI in the form of reserves or
balances .
• Higher the CRR with the RBI lower will be
the liquidity in the system and vice-versa.RBI
is empowered to vary CRR between 15
percent and 3 percent.
• As of October 2012, the CRR is 4.5 percent
 Repo Rate

• Repo rate is the rate at which RBI lends to

commercial banks generally against
government securities. Reduction in Repo rate
helps the commercial banks to get money at a
cheaper rate and increase in Repo rate
discourages the commercial banks to get
money as the rate increases and becomes
expensive
 Reverse Repo Rate
• Reverse Repo rate is the rate at which RBI
borrows money from the commercial banks.
The increase in the Repo rate will increase the
cost of borrowing and lending of the banks
which will discourage the public to borrow
money and will encourage them to deposit.

• As the rates are high the availability of credit

and demand decreases resulting to decrease
in inflation. This increase in Repo Rate and
Reverse Repo Rate is a symbol of tightening of
the policy. As of October 2011, the repo rate is
8.25 and reverse repo rate is 7.25
 FISCAL POLICY

"Fiscal policy is the part of the government policy

which is concerned with the raising revenue
through taxation and other means to decide on
the level and pattern of expenditure“
 OBJECTIVE
1. Development of
For development of Country , every country has to make fiscal
policy . With this policy , all work work is done govt. planning
and proper use of fund for development functions . If govt. does
not make fiscal policy , then it may happen that revenue may
be misused without targeted expenditure of govt.

2. Employment

Getting the full employment is also objective of fiscal policy .

Govt. can take many action for increase employment.
Government
can fix certain amount which can be utilized for creation of new
employment for unemployed individuals.
 OBJECTIVE CONT…

3. The distribution of Income

In developing country like India , we can see the difference one
basis of earning . 10% of people are earning more than Rs.
1,00,000 per day and other are earning less than Rs . 100 per
day . By making a good fiscal policy , govt. can reduce this
difference . If govt makes it as his target .
4. Aggregate demand and the level of economic activity
Total demand for the final goods and services in the economy at
a given time and price level.
5. The pattern of resource allocation
The process of dividing up and distributing available, limited
resources to competing, alternative uses that satisfy unlimited
wants
and needs.
INSTRUMENTS OF FISCAL POLICY

• Government Taxation

• Expenditure
 STANCES OF FISCAL POLICY

• Neutral Fiscal Policy

• Expansionary Fiscal Policy

• Contractionary Fiscal Policy

 METHODS OF FUNDING

• Taxation

• Seignior age

• Borrowing

• Consumption

• Sales
 FISCAL DEFICIT

• "TOTAL REVENUE SHOULD BE GREATER

THAN THE EXPENDITURE“
• EXAMPLE FOR FISCAL DEFICIT
 BORROWING

– Issue of bonds
• Bonds refer to debt instruments bearing interest
on maturity.
– Treasury Bills
• They are the instrument of short-term borrowing
by the Government of India , issued as
promissory notes under discount.
– Gilt-edged securities
• A constituent account maintained by
a custodian bank for maintenance and servicing
of dematerialized government securities owned
by a retail customer.
 BUDGET
• The union budget
– The union budget which is yearly affair comprehensive
display of govt. finance

• The structure of the budget

• State budgets
– Estimate of the receipt and expenditures are presented
by state govt.

• Finances of the union and states

• Sources of revenue union
– Taxes on income other than agriculture income
 BUDGET CONT….

• Sources of revenue for the state

– Land revenue including the assessment
collection revenue
– Duties respect of suction of agriculture land
• Concurrent list
– Stamp duties other than duties or fees
collected by judicial stamp

• The finance commission

 IMPORTANCE OF BUDGET

• Accelerate the phase of economics

• Effect improvement in production in private
sector
• Effective improvement in income distribution
• Promote exports and encourage imports sub
• Achieve economics stabilisation