Monetary and Fiscal Policy of India

S.Bharathi
B.S ABM
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.

Reserve Bank of India states that,

Monetary policy refers to the use of instruments under the
control of the central bank to regulate the availability, cost and
use of money and credit.
Objectives
Maintaining price stability
Ensuring adequate flow of credit to the productive Sectors
of the economy to support economic growth
Rapid economic growth
Balance of payment equilibrium
Full employment
Equal income distribution
Methods
The RBI aims to achieve its objectives of economic growth
and control of inflation through various methods.

These methods can be grouped as:

General/ quantitative methods
Selective/ qualitative methods
General/ Quantitative methods

These methods maintain and control the total quantity or

volume of credit or money supply in the economy.
Open Market Operations
Open market operations indicate the buying/ selling of govt. securities in the open
market to balance the money supply in the economy

Deployment of Credit
The RBI has taken various measures to deploy credit in different sector of the
economy. The certain %age of the bank credit has been fixed for various sectors like
agriculture, export etc.
Direct Instruments
Cash reserve ratio (CRR)
The money supply in the economy is influenced by CRR.

It is the ratio of a banks time and demand liabilities to be kept in reserve with the RBI.

The RBI is authorized to vary the CRR between 3% and 15%.

Statutory liquidity ratio (SLR):

Under SLR, banks have to invest a certain percentage of its time and demand liabilities in govt.
approved securities.

The reduction in SLR enhances the liquidity of commercial banks.

 Indirect Instruments
Liquidity Adjustment Facility (LAF):
Consists of daily infusion or absorption of liquidity on a repurchase basis,
through repo (liquidity injection) and reverse repo (liquidity absorption)
auction operations, using government securities as collateral.
i. Repo Rate:
Repo rate is the rate at which the RBI lends shot-term money to the banks
against securities. When the repo rate increases borrowing from RBI becomes
more expensive.
ii. Reverse Repo Rate:
The rate at which RBI borrows from commercial banks.
 Marginal Standing Facility (MSF): Market Stabilization Scheme (MSS):
Instituted under which scheduled commercial Liquidity of a more enduring nature arising from
banks can borrow over night at their discretion up large capital flows is absorbed through sale of
to one per cent of their respective NDTL at 100 short-dated government securities and treasury
basis points above the repo rate to provide a safety bills.
valve against unanticipated liquidity shocks
The mobilized cash is held in a separate
Bank rate: government account with the Reserve Bank.

Bank Rate is the rate at which central bank of the

country (in India it is RBI) allows finance to
commercial banks.
Bank Rate is a tool, which central bank uses for
short-term purposes.
Any upward revision in Bank Rate by central bank
is an indication that banks should also increase
deposit rates as well as Base Rate / Benchmark
Prime Lending Rate.
 SELECTIVE/ QUALITATIVE MEASURES
The RBI directs commercial banks to meet their social obligations through selective/ qualitative
measures.
These measures control the distribution and direction of credit to various sectors of the economy.

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 Banks current assessment suggests that the threshold
level of inflation for India is in the range of 46 per cent.
How does monetary policy affect inflation and
other problems?

decreases
raises
FISCAL POLICY
Meaning
Fiscal policy deals with the taxation and expenditure
decisions of the government. These include, tax policy,
expenditure policy, investment or disinvestment strategies
and debt or surplus management.
- Kaushik Basu ( Former Chief Economic Adviser )
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
Direct Tax Indirect Tax

Individual Income Tax & central excise (a tax on

Corporate Tax. manufactured goods)
Wealth Tax @ 1% VAT @ 12.5%
Tax deducted at source service tax @ 12%
customs duty
Educational cess @ 3%
 Expenditure Budget
The central government is responsible for issues that usually concern the country as a
whole like national defence, foreign policy, railways, national highways, shipping,
airways, post and telegraphs, foreign trade and banking.

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 5.3 % of GDP
Major Changes in Budget(2013-14) to curb Deficit
One year surcharge of 10 % on the Superrich.
Increased Duties on Imported or domestic luxury vehicles
such as SUVs, Mobiles (>Rs.2000), set top boxes, A/c
restaurants and Cigarettes.( bring in Rs.18,000 crores)
Disinvestment Proceedings to be around Rs.55,000 Crore for
this fiscal.
No additional subsidy for fuel, food and fertilizer prices.
Buyers of immovable property other than agriculture land
will have to pay a tax of 1% of the sale where the value
exceeds Rs.50 lakh.
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

[4] Reserve Bank of India www.rbi.org.in

[5] Project on Monetary Policy of Reserve Bank of India

[6] Shweta Punj Who will blink first? Chidambaram-Subbarao differences erupt into the open after monetary
policy review November, 2012

[7] Sharanarthy Jaswanth Inflation Vs Growth, Business line, 2011

[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] Indias 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
Be Good Do Good

Thank U