Monetary & Fiscal

Policies of INDIA
Somya Agrawal
Amish Daniel
Nikhil Girme
Priyesh Agrawal
Siddhartha Das
Sneha Bhadoria

(09020541004)
(09020541008)
(09020541022)
(09020541042)
(09020541047)
(09020541054)

Fiscal Policy???
Fisc-> State Treasury
Fiscal Policy-> use of
government finances

Objectives..

To achieve
macroeconomic goals

Relating to any typical

problem

Macroeconomic Goals!!!

Economic
Growth

Employm
ent

Economic
stability

Stabilizat
ion

Price
Stability

BUDGET
A budget is a detailed plan of
operations for
some specific future
period
Components of budget
Revenue receipts
Capital receipts
Revenue expenditure
Capital expenditure

Revenue Receipts
Revenue receipts
700000

600000

500000

400000

300000

200000

100000

0
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

Revenue receipts

Capital Receipts
Capital Receipts
400000
350000
300000
250000
Capital Receipts
200000
150000
100000
50000
0
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

Revenue Expenditure
Revenue Expenditure
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

Revenue Expenditure

Capital Expenditure
Capital Expenditure
140000

120000

100000

80000

60000

40000

20000

0
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

Capital Expenditure

Instruments of Fiscal Policies

Budgetar
y surplus
and
deficit

Governm
ent
expendit
ure

Public
Debt

Taxation

Government Expenditure
Government

spending on the
purchase of goods & services.

Payment

of wages and salaries of

government servants

Public

investment

Transfer

payments

Government Expenditure

Government Expenditure

Taxation
Non quid pro quo transfer of private
income to public coffers by means of
taxes.
1.

Direct taxes- Corporate tax, Div.

Distribution Tax, Personal Income Tax,
Fringe Benefit taxes, Banking Cash
Transaction Tax
2. Indirect taxes- Central Sales Tax,
Customs, Service Tax, Excise duty.

Direct Tax
Direct Tax
400000
350000
300000
250000
Direct Tax
200000
150000
100000
50000
0
1990-91

2000-01

2002-03

2003-04

2004-05

2005-06

2006-07 2007-08a 2008-09

2008-09

Indirect Tax
Indirect Tax
350000

300000

250000

200000

Indirect Tax

150000

100000

50000

0
1990-91

2000-01

2002-03

2003-04

2004-05

2005-06

2006-07 2007-08a 2008-09

2008-09

Tax Slabs(09-10)
Table : New Proposed Tax Slabs
Individu
als

Tax Rate

Existing Income Slab

(Rs)

Proposed Income
Slab (Rs)

Nil

Up to Rs 1,60,000*

Up to Rs 1,60,000*

10%

1,60,001 3,00,000

1,60,001-10,00,000

20%

3,00,001 5,00,000

10,00,001-25,00,000

30%
Over 5,00,000
Over 25,00,000
* Minimum slab changes to Rs 1.9 lakhs for women and Rs
2.4 lakhs for senior citizens

Taxation Contd..
The

Tax system has been

modernized considerably.

Eliminating

exemptions and
loopholes for both direct and indirect
taxes would level the playing field,
reduce distortions and make the
system simpler for both tax
payers and the administration.

Public Debt

1.
2.

Internal borrowings

Borrowings from the public by means of

treasury bills and govt. bonds
Borrowings from the central bank
(monetized deficit financing)

External borrowings
Foreign investments
International organizations like
World Bank & IMF
3. Market borrowings
.
1.
2.

Budgetary Surplus & Deficit

Early

1980s:net of depreciation
consistently negative.
Late 1980s:large deficit averaging
about 8% of GDP
Post liberalization: Fiscal deficit
decreased.
LPG effect was till 1996-1997
2001:Fiscal deficit increased to 10%
of GDP.

Budgetary Surplus & Deficit

2003:FRBM

was adopted.
FRBM improved the transparency in
budgetary policy.
As a result fiscal deficit decreased to
3.7% of GDP.
In 2007-2008 fiscal deficit was 2.7 %
Shot up to 6 % in 2008-2009.

Fiscal Deficit(as % of
GDP)

Fiscal Deficit (in crores

of Rs.)
Fiscal Deficit
350000

300000

250000

200000
Fiscal
Deficit
150000

100000

50000

0
1990-91

2000-01

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08a

2008-09

2008-09

Fiscal Policy Overview

(2009-10)

Budget 2008-09 presented in the backdrop

of impressive growth.
Fiscal deficit 2009-10 estimated at 2.5 per
cent of GDP
After presentation of budget Indian
economy was hit by global crisis.
Fiscal policy shifted from fuelling growth to
containing inflation, which had reached
12.9 per cent in August, 2008.
Stimulus package of Rs .1,50,320 crore
was provided

Tax Policy
Customs:
1.
2.

Sharp reduction was effected in the import duty

rates of various food items.
Import duties on crude petroleum was reduced to
nil and on petrol and diesel to 2.5% (earlier 7.5%).

.Excise:

Reduction of 4 %points in the ad valorem rates of

excise duty on non-petroleum items.
.Service
1.
2.

tax:
Service Tax continued at 10%.
Tax base widened.

Government Borrowings,
Lending and Investments
The

gross borrowings: Rs 2,40,167

crore

The

net borrowings : Rs 1,68,710

An

Overdraft (OD) for 24 days daily

average of OD was Rs.11,233 crore.

Government

has set up National

Investment fund

Policy Evaluation
Fiscal

consolidation during the FRBM act.

2007-08:fiscal

deficit was 2.7%.

Increase

in fiscal deficit due to global

meltdown (10.3% of GDP).

Government

steps helped reduce

inflation(7.8%).

India

still growing at the rate of 6.7%(08-09)

Monetary Policy??
The part of the economic policy which
regulates the level of money in the
economy in order to achieve certain
objectives.
In INDIA,RBI controls the monetary policy.
It is announced twice a year, through which
RBI,regulate the price stability for the
1.Slack season
April-September
economy.
policy
2.Busy season

October-March

Central Banks
India
U.S.A.
U.K.
Pakistan

Reserve Bank of India.

Federal Reserve bank.
Bank of England.
Bank of Pakistan.

Establishment of RBI

Established in April 1935 with a share capital

of Rs. 5 crores.

Nationalized in the year 1949.

Initially established in Calcutta but

permanently moved to Mumbai in 1937.
Governor of RBI : D. Subbarao

Objectives of monetary policy

Maximum

feasible output.
High rate of growth.
Growth in employment & income
Price stability.
Stability of Forex & national currency
Inflation Control
Greater equality in the distribution of income
and wealth.
Healthy balance in balance of payments(BOP).

Types of control
MONETARY
POLICY

QUALITATIVE
CONTROL

QUANTITATIV
E
CONTROL

Quantitative control
Tools
Open market operations:
The open market operations is sale and
purchase of government securities and Treasury
Bills by the central bank of the country.
When the central bank decides to pump money
into circulation, it buys back the government
securities, bills and bonds.
When it decides to reduce money in circulation
it sells the government bonds and securities.
The central bank carries out its open market
operations through the commercial banks.

OMOs Tools
Repo rate:
A repurchase agreement or ready forward deal
is a secured short-term (usually 15 days) loan
by one bank to another against government
securities.
Legally, the borrower sells the securities to the
lending bank for cash, with the stipulation that
at the end of the borrowing term, it will buy
back the securities at a slightly higher price, the
difference in price representing the interest.

12
10
8
6
4
2

Reverse repo rate is the rate that RBI offers

the banks for parking their funds with it.
Reverse repo operations suck out liquidity from
the system.

Bank Rate Policy

Bank rate is the minimum rate at which the central
bank provides loans to the commercial banks. It is also
called the discount rate.
Dear money

policy:
Bank rate inc
interest rate inc
borrowing will
be less profitable
results contraction of credit.

Near money

policy:
Bank rate dec
interest rate low
borrowing
will be more profitable
results expansion of credit.

Trends of Bank Rate

Chart Title

14.00
12.00
10.00
8.00
in %
6.00
4.00
2.00
0.00

Years

In 1940s BR was at low 3% and

remained unchanged till 1953.In
1953 RBI adopted policy
controlled expansion BR raised to
3.5%.It reached at max. level in

Reserve Requirements
Changes:
The central bank of a country is empowered to
determine within statutory limits, the cash
reserve requirements of the commercial banks.
Statutory

liquid ratio:
Bank has to keep portion of
total deposits with itself in liquid assets.
Cash reserve ratio:
The percentage of banks
deposits which they must keep as cash with
RBI.

SLR Trend
It was 25% in
1949 after that it
increased
continuously
32%(1972)--- 35%
(1981)--36%(1984)--38%(1988).
From 1997 it is
constant at 25%

CRR Trend
In beginning it
was 5% of
demand deposit &
2% of time
deposits.
Reached max. in
1991,92 after
1993 it followed
Narsimham report
& decreased.
But from dec.06
it raised 7 times,
250bp to cool
credit growth &
supply.

Currently, it is 5
%

Qualitative Control Tools:

o

Selective credit control

They are distinguishable from quantitative tools

by the fact that they are directed towards
particular uses of credit and merely to total
volume outstanding.

Important selective control measures are:

Rationing of credit.
Changes in margin requirements.
Moral suasion.

Credit Rationing

When there is a shortage of institutional credit

available for the business sector, the large and
financially strong sectors or industries tend to
capture the lions share in the total institutional
credit.
As a result the priority sectors and essential
industries are of necessary funds.

Below two measures are generally adopted:

Imposition of upper limits on the credit available to
large industries and firms
Charging a higher or progressive interest rate on the
bank loans beyond a certain limit.

Change in Lending
Margins

The banks provide loans only up to a certain

percentage of the value of the mortgaged
property.

The gap between the value of the mortgaged

property and amount advanced is called Lending
Margin.

The central bank is empowered to increase the

lending margin with a view to decrease the bank
credit.

Moral Suasion

The moral suasion is a method of persuading

and convincing the commercial banks to
advance credit in accordance with the directives
of the central bank in overall economic interest
of the country.

Under this method the central bank writes letter

to hold meetings with the banks on money and
credit matters.

EXPANSIONARY MONETARY
POLICY
Problem:
Measures:

Recession and unemployment

(1) Central bank buys securities
through open market

operation
(2) It reduces cash reserves ratio
(3) It lowers the bank rate

Money supply increases

Investment increases

Aggregate demand increases

Aggregate output increases by a

multiple of the increase in investment

CONTRACTIONARY MONETARY
POLICY
Problem:
Measures:

Inflation
(1) Central bank sells securities
through open market operation
(2) It raises cash reserve ratio
and statutory liquidity
(3) It raises bank rate
(4) It raises maximum margin against
holding of stocks of goods
Money supply decreases
Interest rate raises

Investment expenditure declines

Aggregate demand declines

Price level falls

Recommendation of Narshimham Committee Nov.1991

SLR should not be used for directed

investment in PSUs. It should be lower down
to minimum limit of 25%
CRR should be lower than the present rate.
As an instrument it should be used less &
Govt. should depend upon OMOs.
Selective credit control should be slowly
phased out
Prime lending rate of commercial bank
should be independent of RBI control

How Monetary Policy Controls Inflation?

CENTRAL BANK

CASH

E
E
AS
RE RAT
INC ING
ND
LE

SO
LD

CASH RESERVE
RATIO

STATUTORY
LIQUID RATIO

REA
CRR SE IN
%

BANK RATE

INC

SECURITIES AND
TRESURY BILLS

COMMERCIAL BANKS
REDUCED BORROWING OF
LOANS

CORPORATES

REDUCE LIQUIDITY
IN MARKET

INDIVIDUALS

Monetary Policy of India - Overview

The Monetary Policy aims to maintain price stability, full
employment and economic growth.
Emphasis on these objectives have been changing time to
time depending on prevailing circumstances.
For explanation of monetary policy, the whole period has
been divided into 4 sub periods:
a) Monetary policy of controlled expansion (1951 to
1972)
b) Monetary Policy during Pre Reform period (1972 to
1991)
c) Monetary Policy in the Post-Reforms (1991 to 1996)
d) Easing of Monetary policy since Nov 1996

Monetary policy of controlled expansion

(1951 to 1972)
To regulate the expansion of money supply and bank
credit to promote growth.
To restrict the excessive supply of credit to the private
sector so as to control inflationary pressures.
Following steps were taken:
1. Changes in Bank Rate from 3% in 1951 to 6% in 1965
and it remained the same till 1971.
2. Changes in SLR from 20% in 1956 to 28% in 1971.
3. Select Credit Control: In order to reduce the credit or
bank loans against essential commodities, margin was
increased.

Monetary Policy during Pre Reform period

(1972 to 1991)
Also known as the Tight Monetary policy: Price
situation worsened during 1972 to 1974.
Following Monetary Policy was adopted in 70s
and 80s which were mainly concerned with the
task neutralizing the impact of fiscal deficit and
inflationary pressure.
1) Changes in CRR to the maximum limit of 25%
2) Changes in SLR also to the maximum limit of
38.5%

Monetary Policy in the Post-Reforms

1991 to 1996
The year 1991-1992 saw a fundamental change in the
institutional framework It had twin objectives which were
Price stability and economic growth.
1) Continuing the same maximum CRR and SLR of 25%
and 38.5%, mopped up bank deposits to the extent of
63.5%
2) In order to ensure profitability of banks, Monetary
Reforms Committee headed by late Prof. S Chakravarty,
recommended raising of interest rate on Government
Securities which activated Open Market Operations
(OMO).
3) Bank rate was raised from 10% in Apr 1991 to 12% in

Easing of Monetary policy since Nov

1996:
In 1996-97, the rate of inflation sharply declined. In the
later half 1996-97, industrial recession gripped the Indian
economy. To encourage the economic growth and to
tackle the recessionary trend, the RBI eased its monetary
policy.
1. Introduction of Repo rate. Repo rate increased from
3% in 1998 to 6.5% in 2005. This instrument was
consistently used in the monitory policy as a result of
rapid industrial growth during 2005-06.
2. Reverse Repo rate Through RRR, the RBI mops up
liquidity from the banking system. The Repo rate was
cut from 3.50% to 3.25%.

Easing of Monetary policy

since Nov 1996: (Contd)
3. Flow of credit to Agriculture The flow of credit to
agriculture has increased from 34,013 (9.2% of overall
credit) in 2008 to 52,742 (13% in overall credit) in
2009 (Rs. in crore).
4. Reduction in Cash Reserve Ratio The CRR which was
at 15% until 1995 gradually reduced to 5% in 2005.
The CRR remained unchanged in the current monetary
policy.
5. Lowering Bank rate The Bank rate was gradually
reduced from 12% in 1997 to 6% in 2003.

RBI In Recession
CRR cut to 5%
Repo rate cut to 5.5%
Reverse Repo rate cut to 4%
Short-term lending and borrowing

rates

cut
Slashed tax rates
Injection of Money
Opening up new borrowing channels for
banks
Government hikes its spending

Review of 2009/10 Monetary

Policy
GDP growth at 7.9% for Q2 2009 which was predicted
to be 6.3

WPI-currently at 4.78%. Food Inflation touched 19%

because of easy monetary policies & decreasing
agricultural production
Bank Rate has been retained unchanged at 6.0 per
cent

Repo Rate has been retained unchanged at 4.75 per

cent

Reverse Repo Rate has been retained unchanged at

3.25 per cent

IS CURVE

LM CURVE

IS/LM CURVE

Shifts in Curve
Expansionary Fiscal Policy - shifts IS right: will tend to
increase Y and also increase the interest rate (r)
Contractionary Fiscal Policy - shifts IS left: will tend to reduce
both Y and r
Expansionary Monetary Policy - shifts LM right - reduces r
and increases Y
Contractionary Monetary Policy - shifts LM left
increases r and reduces Y

Shifts in Curve

Thank
You.