bus env-ii class 2

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BUSINESS ENVIRONMENT-IIBY

S.SENTHIL GAVASKAR M.E;MBA ;(P.hD)

CLASS :2DATE:19/8/2013

Copy Right University of Madras
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contentsSalient features of Indian economic planning

Achievements of economic planningUrbanization and its impact

Fiscal Policy

Monetary policy

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SALIENT FEATURES OF INDIAS FIVE YEAR PLANS

Democratic

Decentralized planning

Regulatory mechanismExistence of central and state plan

Public and private sector plan

Periodic plan

Balanced regional developmentPerspective planning on basic issues or problems

Programme implementation and evaluation



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ACHIEVEMENTS OF PLANNINGIncrease in national income

Increase in per capita income

Increase in rate of capital formation

Development of agriculture

Elimination of disparity among people in the society

Development of infrastructure

Employment generationAttainment of selfreliance

Development of science and technology

Price stability and control



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URBANIZATION AND ITS IMPACT

An urban area is defined as follows: all places with a municipality,

corporation, cantonment board or notified town area committee,

all other places which satisfy the following criteria : 1) a minimum

population of 5000 ii) at least 75% of the male working population

engaged in non-agricultural pursuits iii) a density of population of

at least 400 persons per sq km.



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Urbanization means the proportion of a nations population

living in urban areas. Urbanization occurs when the urban

population increases at a rate higher than that of the increase

in total population.

The degree of urbanization in India has been increasing at a

slow pace. Urban population as a percentage of total

population increased from 17.3 % in 1951 to 45% in 2012.

In India the growth of industries also made a significant

contribution to the cause of urbanization.

Urbanization has taken place largely due to migration of

people from rural to urban areas mainly in search for Job.



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POSITIVE EFFECTS

Economic growth through economies of scale

enlarge market due to population growth results in increase in

demand for products and services

It leads to specialization, inventions, advanced technology, greater

diversity of goods and services. Efficient transport and communication

system .



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NEGATIVE EFFECTS

It leads to overcrowding in cities and considerable pressure on basic civic

amenities.

The Government has to spend huge resource on power, water facilities,

transport, public health and other services.

More demand for specialized labor due to shortage of labour

labors demand for more wages

Increase in pollution rate.

Cost of living is high in urban areas

Difficult to get land within the city, where many industries are located at the

outskirts of the city.

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FISCAL POLICY

In economicsand political science, fiscal policy is the use of government expenditure

and revenue collection (taxation) to influence the economy.

It refers to the Revenue and Expenditure policy of the Govt. which is generally used

to cure recession and maintain economic stability in the country.

Fiscal policy can be contrasted with the other main type of macroeconomic policy,

monetary policy, which attempts to stabilize the economy by controlling interest

rates and spending.

The two main instruments of fiscal policy are government expenditure and taxation.

Changes in the level and composition of taxation and government spending can

impact the following variables in the economy:

Aggregate demandand the level of economic activity; The pattern of resource

allocation; The distribution of income.

http://mail.google.com/mail/?ui=2&ik=7b09742f01&view=att&th=125baa0a465d06f3&attid=0.2&disp=inline&zwhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Political_sciencehttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Aggregate_demandhttp://mail.google.com/mail/?ui=2&ik=7b09742f01&view=att&th=125baa0a465d06f3&attid=0.2&disp=inline&zwhttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Macroeconomicshttp://en.wikipedia.org/wiki/Political_sciencehttp://en.wikipedia.org/wiki/Economicshttp://mail.google.com/mail/?ui=2&ik=7b09742f01&view=att&th=125baa0a465d06f3&attid=0.2&disp=inline&zwhttp://mail.google.com/mail/?ui=2&ik=7b09742f01&view=att&th=125baa0a465d06f3&attid=0.2&disp=inline&zw


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Stances of fiscal policy

The three main stances of fiscal policy are:

i) Neutral fiscal policy is usually undertaken when an economy is in equilibrium.Government spendingis fully funded by taxrevenueand overall the budget

outcome has a neutral effect on the level of economic activity.

ii)Expansionary fiscal policy involves government spending exceeding tax

revenue, and is usually undertaken during recessions.

iii) Contractionary fiscal policy occurs when government spending is lower than

tax revenue, and is usually undertaken to pay down government debt..

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INSTRUMENTS OF FISCAL POLICY

1. Reduction of Govt. Expenditure

2. Increase in Taxation

3. Imposition of new Taxes4. Wage Control

5.Rationing

6. Public Debt

7. Increase in savings

8. Maintaining Surplus Budget



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OTHER MEASURES

1. Increase in Imports of Raw materials

2. Decrease in Exports

3. Increase in Productivity

4. Provision of Subsidies

5. Use of Latest Technology

6. Rational Industrial Policy

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Methods of funding

Governments spend moneyon a wide variety of things, from the

military and police to services like education and healthcare, as

well as transfer paymentssuch as welfare benefits. This

expenditure can be fundedin a number of different ways:

Taxation

Seigniorage, the benefit from printing money

Borrowingmoney from the population or from abroadConsumptionof fiscal reserves.

Saleof fixed assets (e.g., land).

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Borrowing

A fiscal deficit is often funded by issuing bonds, like treasury bills

or consolsand gilt-edged securities. These pay interest, either for a

fixed period or indefinitely. If the interest and capital requirements

are too large, a nation may defaulton its debts, usually to foreign

creditors. Public debt or borrowing : it refers to the government

borrowing from the public.

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What is monetary policy?The Monetary and Credit Policy is the policy statement, traditionally announced

twice a year, through which the Reserve Bank of India seeks to ensure price

stability for the economy.

The Monetary Policy regulates the supply of money and the cost and availabilityof credit in the economy. It deals with both the lending and borrowing rates of

interest for commercial banks.

The Monetary Policy aims to maintain price stability, full employment and

economic growth.

The Monetary Policy is different from Fiscal Policy as the former brings about a

change in the economy by changing money supply and interest rate, whereas

fiscal policy is a broader tool with the government.



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The Fiscal Policy can be used to overcome recession and control

inflation. It may be defined as a deliberate change in government

revenue and expenditure to influence the level of national output

and prices.

What are the objectives of the Monetary Policy?

The objectives are to maintain price stability and ensure adequate

flow of credit to the productive sectors of the economy.

Stability for the national currency (after looking at prevailingeconomic conditions), growth in employment and income are also

looked into. The monetary policy affects the real sector through

long and variable periods while the financial markets are also

impacted through short-term implications.Copy Right University of Madras


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INSTRUMENTS OF MONETARY POLICY

1. Bank Rate of Interest

2. Cash Reserve Ratio

3. Statutory Liquidity Ratio

4. Open market Operations5. Margin Requirements

6. Deficit Financing

7. Issue of New Currency

8. Credit Control



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1.BANK RATE OF INTEREST

It is the interest rate which is fixed by the RBI to control the

lending capacity of Commercial banks . During Inflation , RBI

increases the bank rate of interest due to which borrowing

power of commercial banks reduces which thereby reduces the

supply of money or credit in the economy .When Money

supply Reduces it reduces the purchasing power and thereby

curtailing Consumption and lowering Prices.



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2. CASH RESERVE RATIO (CRR)

CRR, or cash reserve ratio, refers to a portion of deposits (as

cash) which banks have to keep/maintain with the RBI. During

Inflation RBI increases the CRR due to which commercial

banks have to keep a greater portion of their deposits with

the RBI . This serves two purposes. It ensures that a portion of

bank deposits is totally risk-free and secondly it enables that

RBI control liquidity in the system, and thereby, inflation.



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3. STATUTORY LIQUIDITY RATIO (SLR)

Banks are required to invest a portion of their deposits in

government securities as a part of their statutory liquidity

ratio (SLR) requirements . If SLR increases the lending capacity

of commercial banks decreases thereby regulating the supply

of money in the economy.



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4. OPEN MARKET OPERATIONS

It refers to the buying and selling of Govt. securities in the

open market . During inflation RBI sells securities in the open

market which leads to transfer of money to RBI.Thus money

supply is controlled in the economy.



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5. MARGIN REQUIREMENTS

During Inflation RBI fixes a high rate of margin on the

securities kept by the public for loans .If the margin increases

the commercial banks will give less amount of credit on the

securities kept by the public thereby controlling inflation.



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6. DEFICIT FINANCING

It means printing of new currency notes by Reserve Bank of India.

If more new notes are printed it will increase the supply of money

thereby increasing demand and prices.

Thus during Inflation, RBI will stop printing new currency notes

thereby controlling inflation.



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7. ISSUE OF NEW CURRENCY

During Inflation the RBI will issue new currency notes replacing

many old notes.

This will reduce the supply of money in the economy.



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THANK YOU

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