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Agenda
• Introduction
• Monetary Policy
– Role & Objectives
– Instruments
– Inflation
• Fiscal Policy
– Role & Objectives
– Budget -> Revenue and Expenditure
– Taxation -> Structure
– Fiscal Deficit
• Reviews
• Conclusion
INTRODUCTION
Monetary Policy
Monetary Policy –Meaning….
It is the ratio of a bank’s time and demand liabilities to be kept in reserve with the RBI.
CEILING ON CREDIT
MARGIN REQUIREMENTS
DISCRIMINATORY RATES OF INTEREST
FACTORS AFFECTING MONETARY POLICY
There exist a non-monetized sector
Excess of non-banking financial institutions (NBFI)
Existence of unorganized financial market
Money not appearing in an economy
Time lag affects success of monetary policy
Monetary policy and fiscal policy lacks coordination
INFLATION
• Inflation is broadly understood as the general rise in the
prices of goods and services year on year, inflation is a more
complex phenomena associated with the money supply and
currency values.
Problems caused by Inflation
• High and persistent inflation imposes significant socio-economic
costs.
• High inflation distorts economic incentives by diverting resources
away from productive investment to speculative activities.
• Inflation reduces households saving as they try to maintain the
real value of their consumption.
• If domestic inflation remains persistently higher than those of the
trading partners, it affects external competitiveness through
appreciation of the real exchange rate.
The Reserve Bank’s current assessment suggests that the threshold
level of inflation for India is in the range of 4–6 per cent.
How does monetary policy affect inflation and
other problems?
decreases
raises
FISCAL POLICY
Meaning
OBJECTIVES OF FISCAL POLICY
• Increase in capital formation.
• Degree of Growth.
• To achieve desirable price level.
• To achieve desirable consumption level.
• To achieve desirable employment level.
• To achieve desirable income distribution.
Fiscal Policy there are three possible
positions
• A Neutral position applies when the budget outcome has
neutral effect on the level of economic activity where the
govt. spending is fully funded by the revenue collected
from the tax.
• An Expansionary position is when there is a higher
budget deficit where the govt. spending is higher than the
revenue collected from the tax.
• An Contractionary position is when there is a lower
budget deficit where the govt. spending is lower than the
revenue collected from the tax.
The Two Main instruments of fiscal policy
• Revenue Budget
• Expenditure Budget
Revenue Budget
• The taxing powers of the central government
encompass taxes on income, excise on goods
produced (other than alcohol), customs duties,
and inter-state sale of goods.
• The state governments are vested with the
power to tax land and buildings, sale of goods
(other than inter-state), and excise on alcohol.
Direct Tax Indirect Tax
• The state governments are responsible for other items including, law and order,
agriculture, fisheries, water supply and irrigation, and public health.
• Some items for which responsibility vests in both the Centre and the states include
forests, economic and social planning, education, trade unions and industrial
disputes, price control and electricity.
The Expenditure budget includes four main revenue expenditures
• Total expenditure is Rs.16,65,297 crores (11.5% increase)
Fiscal Deficit
• Fiscal Deficit = Total Expenditure (that is Revenue Expenditure +
Capital Expenditure) – (Revenue Receipts + Recoveries of Loans +
Other Capital Receipts)
• Currently the deficit is 3.6 % of GDP
Fiscal Roadmap in Budget(2015-16) …
• Fiscal Deficit target made 3.9% in 2015-16, 3.5% in 2016-17 and 3% in 2017-18.
• Reduced subsidy burden due to softening crude oil price from $ 115 in Jan 2014 to
$ 60 in Jan 2015, DBT, rationalization of other subsidy provide enough cushion to
achieve fiscal target.
Conclusion
• Fiscal deficit
• Current account deficit
• Currency depreciation
• Lower growth
• Supply side gap in Food (inflation)
• Only 42800 earn more than 1 crore and 1.9 lakh people
earn more than 10 lakhs!!!!!!
Reviews
Subbarao, RBI Governor (2012) explained that, India is unique in the
sense that we are one of the economies in the world that is supply constrained. There
is shortage of infrastructure both in quantum and quality. We need to improve that so
that corporates become more competitive, so that economic production becomes
more competitive. First on infrastructure, second, we need to improve supply of food,
especially of protein foods. Third, is skilled labour. It is one thing to have a huge
labour force but another to have a labour force that is not adequately skilled. The skill
shortage is going to be a big threat.
Bhatt (2012) suggested that the need of today is not just the pumping of
liquidity in to the Indian economy but also in addition the injection of demand. This
can occur only through direct fiscal action by government. In India, larger
government expenditure has to be oriented towards agriculture, rural development,
health, human resources and infrastructure to make inclusive and balanced growth.
REFERENCES:
[1] Dr. Rajiv Kumar Bhatt: Associate Professor of Economics at Banaras Hindu University “Recent Global Recession and Indian Economy: An Analysis” International Journal of
Trade, Economics and Finance, Vol. 2, No. 3, June 2011
[2] Dr. Kausik Basu: Former Chief Economic Advisor “Fiscal Policy in India: Trends and Trajectory” Supriyo De January, 2012
[3] Dr. Sunita Mishra “Has our monetary policy been successful in checking inflation?” International Journal of Research in Finance & Marketing, http://www.mairec.org May 2012
[6] Shweta Punj “Who will blink first? Chidambaram-Subbarao differences erupt into the open after monetary policy review” November, 2012
[8] Jagdish Bhagwati “RBI overplaying inflation; must focus on growth now”, PTI Nov 21, 2012
[9] Venky Vembu “Inflation vs growth: Stiglitz is wandering in the wrong continent”, Oct 18, 2012
[10] India’s Reserve Bank and Government Lock Horns in Growth vs. Inflation Debate, November 1, 2012
[11] D H Pai Panandiker “The growth versus inflation dilemma”, July 19, 2012
[12] “Should policy focus on growth or inflation?” DEBATE Business Standard / May 16, 2012
[13] RBI Governor Duvvuri Subbarao “People are making too much of the finance minister's response”
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