Monetary & Fiscal

Policies of INDIA
 Fiscal Policy???


 Fisc-> State Treasury



 Fiscal Policy-> use of

government finances
Objectives…………..

→To achieve macroeconomic

goals


→Relating to any typical

problem
Macroeconomic
Goals!!!
Instruments of Fiscal
Policies
Government Expenditure

 Government spending on the

purchase of goods & services.

 Payment
of wages and salaries of
government servants

 Public investment

 Transfer payments
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,
Public Debt

 Internal borrowings
1.Borrowings from the public by means of
treasury bills and govt. bonds
2.Borrowings from the central bank
(monetized deficit financing)

 External borrowings
1.Foreign investments
2.International organizations like World
Bank & IMF
3.Market borrowings

 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.

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 economy.

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).

 EXPANSIONARY MONETARY
POLICY
Problem: Recession and
unemployment
Measures: (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
 
 CONTRACTIONARY MONETARY
POLICY
Problem: Inflation
Measures: (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
 How Monetary Policy Controls Inflation?

CENTRAL BANK

SECURITIES AND TRESURY BILLSBANK RATE INC CASH RESERVE RATIOSTATUTORY LIQUID RATIO

RR
CASH

N C
REA RATE

SO
LD
SE

SE I
%
LEN

EA
DIN

INCR
G

COMMERCIAL BANKS

REDUCED BORROWING OF LOANS

REDUCE LIQUIDITY IN
CORPORATES 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