Monetary Policy –Meaning….Reserve Bank of India states that,• Monetary policy refers to the use of instruments under thecontrol of the central bank to regulate the availability, cost anduse of money and credit.
Objectives• Maintaining price stability• Ensuring adequate flow of credit to the productive Sectorsof 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 growthand 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 orvolume of credit or money supply in the economy.– Open Market Operations• Open market operations indicate the buying/ selling of govt. securities in the openmarket to balance the money supply in the economy– Deployment of Credit• The RBI has taken various measures to deploy credit in different sector of theeconomy. The certain %age of the bank credit has been fixed for various sectors likeagriculture, export etc.
Direct InstrumentsCash reserve ratio (CRR) The money supply in the economy is influenced by CRR. It is the ratio of a bank’s 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 InstrumentsLiquidity 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 banksagainst securities. When the repo rate increases borrowing from RBI becomesmore expensive.ii. Reverse Repo Rate:– The rate at which RBI borrows from commercial banks.
• Marginal Standing Facility (MSF): Instituted under which scheduled commercialbanks can borrow over night at their discretion upto one per cent of their respective NDTL at 100basis points above the repo rate to provide a safetyvalve against unanticipated liquidity shocks• Bank rate: Bank Rate is the rate at which central bank of thecountry (in India it is RBI) allows finance tocommercial banks. Bank Rate is a tool, which central bank uses forshort-term purposes. Any upward revision in Bank Rate by central bankis an indication that banks should also increasedeposit rates as well as Base Rate / BenchmarkPrime Lending Rate.• Market Stabilization Scheme (MSS): Liquidity of a more enduring nature arising fromlarge capital flows is absorbed through sale ofshort-dated government securities and treasurybills. The mobilized cash is held in a separategovernment account with the Reserve Bank.
SELECTIVE/ QUALITATIVE MEASURES• The RBI directs commercial banks to meet their social obligations through selective/ qualitativemeasures.• 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 theprices of goods and services year on year, inflation is a morecomplex phenomena associated with the money supply andcurrency values.
Problems caused by Inflation• High and persistent inflation imposes significant socio-economiccosts.• High inflation distorts economic incentives by diverting resourcesaway from productive investment to speculative activities.• Inflation reduces households saving as they try to maintain the realvalue of their consumption.• If domestic inflation remains persistently higher than those of thetrading partners, it affects external competitiveness throughappreciation of the real exchange rate.The Reserve Bank’s current assessment suggests that the thresholdlevel of inflation for India is in the range of 4–6 per cent.
How does monetary policy affect inflation andother problems?raisesdecreases
Meaning• Fiscal policy deals with the taxation and expendituredecisions of the government. These include, tax policy,expenditure policy, investment or disinvestment strategiesand 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 possiblepositions• A Neutral position applies when the budget outcome hasneutral effect on the level of economic activity where thegovt. spending is fully funded by the revenue collected fromthe tax.• An Expansionary position is when there is a higherbudget deficit where the govt. spending is higher than therevenue collected from the tax.• An Contractionary position is when there is a lowerbudget deficit where the govt. spending is lower than therevenue collected from the tax.
The Two Main instruments of fiscal policy• Revenue Budget• Expenditure Budget
Direct Tax• Individual Income Tax &Corporate Tax.• Wealth Tax @ 1%• Tax deducted at sourceIndirect Tax• central excise (a tax onmanufactured goods)• VAT @ 12.5%• service tax @ 12%• customs duty• Educational cess @ 3%
Expenditure Budget• The central government is responsible for issues that usually concern the country as awhole 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 includeforests, economic and social planning, education, trade unions and industrialdisputes, 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 vehiclessuch as SUV’s, Mobiles (>Rs.2000), set top boxes, A/crestaurants and Cigarettes.( bring in Rs.18,000 crores)• Disinvestment Proceedings to be around Rs.55,000 Crore forthis fiscal.• No additional subsidy for fuel, food and fertilizer prices.• Buyers of immovable property other than agriculture landwill have to pay a tax of 1% of the sale where the valueexceeds 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 earnmore than 10 lakhs!!!!!!
ReviewsSubbarao, RBI Governor (2012) explained that, India is unique in the sensethat we are one of the economies in the world that is supply constrained. There isshortage of infrastructure both in quantum and quality. We need to improve that sothat corporates become more competitive, so that economic production becomes morecompetitive. 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 labourforce but another to have a labour force that is not adequately skilled. The skill shortageis going to be a big threat.Bhatt (2012) suggested that the need of today is not just the pumping ofliquidity in to the Indian economy but also in addition the injection of demand. Thiscan occur only through direct fiscal action by government. In India, larger governmentexpenditure has to be oriented towards agriculture, rural development, health, humanresources and infrastructure to make inclusive and balanced growth.
REFERENCES: Dr. Rajiv Kumar Bhatt: Associate Professor of Economics at Banaras Hindu University “Recent Global Recession andIndian Economy: An Analysis” International Journal of Trade, Economics and Finance, Vol. 2, No. 3, June 2011 Dr. Kausik Basu: Former Chief Economic Advisor “Fiscal Policy in India: Trends and Trajectory” Supriyo DeJanuary, 2012 Dr. Sunita Mishra “Has our monetary policy been successful in checking inflation?” International Journal ofResearch in Finance & Marketing, http://www.mairec.org May 2012 Reserve Bank of India – www.rbi.org.in Project on Monetary Policy of Reserve Bank of India Shweta Punj “Who will blink first? Chidambaram-Subbarao differences erupt into the open after monetarypolicy review” November, 2012 Sharanarthy Jaswanth “Inflation Vs Growth”, Business line, 2011 Jagdish Bhagwati “RBI overplaying inflation; must focus on growth now”, PTI Nov 21, 2012 Venky Vembu “Inflation vs growth: Stiglitz is wandering in the wrong continent”, Oct 18, 2012 India’s Reserve Bank and Government Lock Horns in Growth vs. Inflation Debate, November 1, 2012 D H Pai Panandiker “The growth versus inflation dilemma”, July 19, 2012 “Should policy focus on growth or inflation?” DEBATE Business Standard / May 16, 2012 RBI Governor Duvvuri Subbarao “People are making too much of the finance ministers response”