MONETRY AND FISCAL POLICY OF INDIA

PRESENTED BYJANARTHANSELVAPRAKASHSOUJANYA

CONTENT

MONETARY POLICY UNION BUDGET FISCAL 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

• Variable Reserve Ratio

• SLR

• Selective Credit Regulation

• Moral Suasion

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