Module VI - ECONOMIC POLICY
Assignment submitted to Assit prof. Roopa Balavenu
Romeo.B Sankarshan Pradeep Kumar
Vijay. N Vaishnavi Navneet Kaur
Nagesh Narashima. L Nithyananda
Nachiketh Mohammed toufeeq
Submitted by MBA 2nd sem B-sec on 10th may, 2013
• Module VI
• Economic policies: Privatisation-Problems and
• Fiscal Policy: Objectives, Instruments, Union Budget,
Reforms –Raja Chelliah Committee
Recommendations, Taxes, Role of Government.
• Monetary Policy: Money, Measures of money
supply, Monetary system in India, Monetary policy-
Tools for credit control. Structure of the Banking
system, RBI and its functions, Banking structure
reforms – Narasimham committee
• Governments generally accept the view that their key role is
to create appropriate public policies that promote economic
growth. Experience has proved that healthy economic growth
is affected by many factors, thereby requiring continuing
efforts by government policies that encourage investment,
foster technology development, provide key services and
create a capable workforce through education and training
each year dozens of laws are proposed by legislature to
improve the nation‟s business climate and promote economic
Objectives of economic policy:
• To achieve faster economic growth.
• To reduce inequalities of economic and wealth.
• To achieve full employment.
• Price stability.
• Balance of payments equilibrium.
• According to the World Bank, privatization “is the
transfer of transfer of ownership of state-owned
enterprises (SOEs) to the private sector by sale (full
or partial) of going concerns or by sale of assets
following the liquidation”.
Prospects of privatization
• To reduce the burden on government
• To strengthen competition and efficiency
• To fund infrastructure growth
• To improve public finances
• Accountability to shareholders
• To reduce unnecessary interference
• More disciplined labour forces
Problems of privatization
• Ownership to a privileged few
• Labourers would be at the mercy of the owner
• Price and Ignorance factors
• Lack of social responsibility
• Fiscal policy is the government‟s schedule
for spending and tax implementation to
influence the economy for the year. The
fiscal policy is concerned with the raising of
government revenue and incurring of
government expenditure. To generate
revenue and to incur expenditure, the
government frames a policy called
budgetary policy or fiscal policy.
OBJECTIVES OF FISCAL
• Development by effective Mobilization of
• Efficient allocation of Financial Resources.
• Reduction in inequalities of Income and
• Price Stability and Control of Inflation
• Employment Generation
• Public Borrowing.
• Forced savings or Deficit Financing.
• Public Expenditure.
Union budget is a comprehensive display of the government’s finances. It
is the most significant economic and financial event in India.
The finance minister puts down a report that contains Government of
India’s revenue and expenditure for one fiscal year. The fiscal year runs
from April 01 to March 31.
The union budget is preceded by an economic survey which outlines the
broad direction of the budget and the economic performance of the
Objectives of Union Budget
Allocation of Resources
Management of Public Enterprises
Problems of Union Budget in India
Gap between Needs and Resources of State Government
Question of State Autonomy
Reduced Importance of the Finance Commission
Failure to Tackle the Problem of Regional Imbalances to Any
Highlights: Union Budget 2013-14
The Union Budget for 2013-14 aims at higher growth rate leading to
inclusive and sustainable development as 'mool mantra'. Finance
Minister P Chidambaram makes three promises: to women, the youth
and the poor.
Nirbhaya Fund to empower women and to keep them safe and
secure, proposal to set up India's first Women's Bank as a public
sector bank, Rs 1,000 crore for skill development of ten lakh youth to
enhance their employability and productivity.
Education gets Rs 65,867 crore, an increase of 17 per cent over RE for
Substantial rise in allocation to the social sector. Allocation for Rural
Development Ministry raised by 46 per cent to Rs 80,194 crore.
Defence has been allocated Rs 2, 03,672 crore.
Drinking water and sanitation will receive Rs 15,260 crore. Rs 1,400
crore is being provided for setting up water purification plants to
cover arsenic and fluoride affected rural areas.
Tobacco products, SUVs and Mobile Phones to cost more.
Relief of Rs 2,000 for the tax payers in the first bracket of 2 to 5
A surcharge of 10 per cent on persons (other than companies)
whose taxable income exceeds Rs 1 crore has been levied.
A grant of Rs 100 crore each has been made to 4 institutions of
excellence including Aligarh Muslim University, Banaras Hindu
University, Tata Institute of Social Sciences, Guwahati and Indian
National Trust for Art and Cultural Heritage (INTACH).
Rs 14,000 crore will be provided to public sector banks for capital
infusion in 2013-14.
Technology Up gradation Fund Scheme (TUFS) for textile to
continue in 12th Plan with an investment target of Rs 1, 51,000 crore.
Benefits or preferences enjoyed by MSME to continue up to three
years after they grow out of this category.
First home loan from a bank or housing finance corporation up to
Rs 25 lakh entitled to additional deduction of interest up to Rs 1
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM)
will receive Rs 14,873 crore as against RE of Rs 7,383 crore in the
July 24, 2013 17
Meaning and definition of Taxation:
According to Taylor, “Taxes are the compulsory payment to Government
without expectation of direct benefit to the tax payer‖.
In other words, it is a liability imposed upon the assesse who may be
individuals, groups of individuals and other legal entities. A charge imposed
by a Government on a service, product, or activity in order to raise revenue.
Tax can be levied on business or personal income.
Types of Taxation
Direct Tax Indirect Tax
• Personal Tax
• Net Wealth Tax
• Capital Tax
• Value Added Tax
• Real estate Tax
• Stamp Duty
• Customs Duties
• Raising Public Revenue
• Regulation and Control
• Reduction of Inequalities in Income and Wealth
• Promoting Capital Formation
• Political Objectives
• Increase in National Income
• Restrict Unnecessary Consumption
July 24, 2013 19
Role of Government in Taxation
• July 24, 2013 • 20
• Providing a Stable set of Institutions, Laws and
• Promoting Effective and Workable competition
• Correcting for Externalities
• Providing public Goods
• Creating an Environment that Fosters Economic
Stability and Growth
• Adjusting for Undesirable Market
Raja Jesudoss Chellaiah Committee on Tax Reforms.
In August 1991, the govt of India constituted a tax reforms
committee headed by Dr.Raja Jesudoss
Chelliah to examine the structure of direct and indirect tax system.
The committee submitted its interim report in February 1992. In this
report the committee stressed the importance of lower rates of
taxation. Reduction in general level of tariff.
The finance minister implemented some of the recommendations in
1993-94 budget. The committee has made for reaching
recommendations for reforms in all the three major sources of central
revenue, income tax, excise and customs.
Objectives of the Raja Chelliah Committee:
To find ways of increasing the share of direct taxes in the total tax
To nationalize direct tax structure through removal of anomalies.
To identify new areas of taxation.
To rationalize custom tariff & excise duties.
To reduce the level of tariff rates to make them internationally
To increase the network of MODVAT and other schemes.
Recommendation of Raja Chelliah Committee:
Lowering rate and narrowing spread: To neutralize the fall in revenue
due to lowering of the rates of taxation it will be necessary to withdraw
some of the tax incentives.
Avoiding double taxation: At present there is double taxation of
partnership firms. The partners pay personal income tax & as a partnership
firm they pay corporate tax. This has to be avoided to lift the industrial
Reducing rate differences between domestic and foreign companies: To
encourage the flow of foreign capital it is also necessary to reduce tax
rate to foreign companies.
The tax rates on domestic and foreign companies to 7.5% profit.
Rationalizing capital gains tax: The system fails to take into account
effects of price inflation over the period during which taxable gain has
Rationalizing wealth tax: For levying wealth tax it is necessary to bring
into focus the distinction between productive and unproductive wealth.
Tariff reduction: Reduction in the general level of tariffs, a reduction in
the dispersion of the tariff rates, a rationalization of the system with
abolition of the numerous end-use exemptions and concessions.
• Monetary policy refers to the policy adopted by the monetary
authority of a country with respect to the supply of money, the
rate of interest and other matters. In other words, it is the
process by which the government, central bank or monetary
authority of a country controls (i) the supply of money, (ii) the
availability of money, and (iii) the cost of money or the rate of
interest in order to attain a set of objectives oriented towards
the growth and stability of the economy.
• The objectives of a monetary policy in India are similar to the
objectives of its five year plans.Indian planning aims at
growth, stability and social justice. After the Keynesian
revolution in economics, many people accepted significance
of monetary policy in attaining following objectives.
• Rapid Economic Growth :- The monetary policy can
influence economic growth by controlling real interest rate and
its resultant impact on the investment. If the RBI opts for a
cheap or easy credit policy by reducing interest rates, the
investment level in the economy can be encouraged. This
increased investment can speed up economic growth. Faster
economic growth is possible if the monetary policy succeeds
in maintaining income and price stability.
• Price Stability:- All the economics suffer from inflation
and deflation. Both inflation are harmful to the economy.
Thus, the monetary policy having an objective of price
stability tries to keep the value of money stable. It helps
in reducing the income and wealth inequalities.
• Exchange Rate Stability:- Exchange rate is the price of a
home currency expressed in terms of any foreign
currency. If this exchange rate is very volatile leading to
frequent ups and downs in the exchange rate, the
international community might lose confidence in our
economy. The monetary policy aims at maintaining the
relative stability in the exchange rate.
• Balance of Payments (BOP) Equilibrium:- Many developing
countries like India suffers from the Disequilibrium in the
BOP. RBI through its monetary policy tries to maintain
equilibrium in the balance of payments.
• Full Employment :- It refers to absence of involuntary
unemployment. In simple words 'Full Employment' stands for
a situation in which everybody who wants jobs get jobs.
However it does not mean that there is a Zero unemployment.
If the monetary policy is expansionary then credit supply can
be encouraged. It could help in creating more jobs in different
sector of the economy.
• Neutrality of Money:- Many economists have always considered
money as a passive factor. According to them, money should play
only a role of medium of exchange and not more than that.
Therefore, the monetary policy should regulate the supply of money.
The change in money supply creates monetary disequilibrium. Thus
monetary policy has to regulate the supply of money and neutralize
the effect of money expansion. However this objective of a
monetary policy is always criticized on the ground that if money
supply is kept constant then it would be difficult to attain price
• Equal Income Distribution:- monetary policy can make special
provisions for the neglect supply such as agriculture, small-scale
industries, village industries, etc. and provide them with cheaper
credit for longer term. This can prove fruitful for these sectors to
come up. Thus in recent period, monetary policy can help in
reducing economic inequalities among different sections of society.
• Strategic goals.
• Annual performance objectives.
• Performance metrics.
• Operational processes and resources required to meet goals.
• Validation and verification of measured values.
• A most suitable interest structure.
• A correct balance between the demand and supply of money.
• The establishment, functioning and growth of financial
institutions of the economy.
• Proper management of public debts.
TOOLS OF CREDIT CONTROL
• These tools can be divided into two categories—
quantitative and qualitative credit control. There are
three main methods of quantitative credit control—
bank rate policy, open market operation and changes
in statutory reserve requirements. The qualitative
methods of credit control are also known as selective
credit control method. These include rationing, direct
action, changes in margin requirements, moral
suasion, etc. the quantitative control measures are
also known as traditional credit control measures.
Traditional credit control
• Bank rate policy: Bank rate is defined as the official
minimum rate at which the central bank rediscounts approved
bills of exchange. When the central bank raises the bank rate,
the obtaining fund from the central bank becomes costlier for
commercial banks. The reverse happens when the bank rate is
lowered during the period of depression.
• Open-market operation: It refer to the purchase and sale of
government securities and other approved securities by the
central bank. An open-market sale decreases the money supply
and a purchase increases the money supply.
• Cash reverse requirements:- : It refers to that portion of
banks’ total cash reserve which they are statutory required to
hold with the RBI. The remaining portion of the total cash
reserves of the banks refers to excess reserves which banks
keep them-selves to facilitate their normal functioning. An
increase in the legal cash reserves ratio decreases the banks’
and their optimum credit creating capacity.
• Statutory liquidity ratio: The main role of the statutory
liquidity ratio is to allocate bank credit between government
and commercial sectors. This instrument is also used to control
the supply of money.
The selective credit control measures are very popular in developing
countries like India. These controls are exercised through official
regulations. Section 21 of Banking Regulation Act 1949 empowers
the RBI to issue directives to banks with regard to advances. These
directives may be with regard to;-
• The purpose for which banks may or may not give advances.
• The margins to be maintained with regard to secured advances.
• The maximum amount of advance to any particular borrower.
• The rate of interest and the other terms and conditions for granting
• The maximum amount up to which guarantee may be given by the
Narrow money (M1) and Broad money (M3)
This concept is known as narrow money (M1) because it consists of
currency plus bank money held by people. There are other liquid or
monetary resources with the public. Hence, there is another concept
of money supply known as broad money- this is referred as M3 by
•we regard ―money‖, ―cash‖ and ―liquidity‖ as one and the same.
According to Redcliffe Committee, ―Spending is not limited by the
amount of money in existence but it is related to the amount of money
people think they can get hold of‖.
•In near money assets, we include fixed deposits or time deposits with
the banking system. Time deposits or fixed deposits contribute to the
liquidity of the general public in three ways:-
Indian policy has focused on accelerating economic development, while
maintaining price and financial stability. RBI has been adopting a
monetary policy that aims at controlled monetary expansion whose twin
(a) To ensure that there is no paucity of funds for all legitimate economic
(b) The availability of funds is not excessive to cause inflation. This
implies that while there is expansion in the supply of money, there is
restraint on the secondary expansion of credit.
With regard to the expansion of money supply, it has to expand it to the
extent that it more than matches the growth in national income. This is
because of two factors:
(a) With the growth in incomes, the demand for money to be set aside as
savings tends to go up, and
(b) with the sizeable growth in the economy, there is a gradual reduction
in non-monetized sector that augments money supply.
1) The depositors can borrow from the banks against time or fixed
deposits in the case of emergency.
2) They can encash their fixed deposits even before their maturity
period – by sacrificing part of the interest; and
3) They are allowed by some banks to withdraw, from out of their fixed
deposits; i.e., use fixed deposits as a form of savings deposits.
• It was after Redcliffe Committee Report that RBI started using two
concepts of money supply – the conventional money supply (M1) an
d broad money supply (M3) which includes, besides conventional
money, fixed deposits with banks.
M2 and M4 are irrelevant
M2 and M4 which are the money stock measures prepared by
RBI. They include post office savings accounts (M2) as well
as all the other deposits with the post office (M4). These
savings and other deposits with the postal system should also
part of the aggregate monetary resources of the people in the
country, since the people consider themselves as liquid
Broad money (M3)
The basic distinction between narrow money (M1) and broad
money (M3) is the treatment of time deposits with banks.
• Narrow money excludes time deposits of the public with the
banking system and , broad money includes time deposits of
the public with the banking system, not as cash proper but as
part of the total monetary resources of the public.
• Monetary Aggregates in India
Actually, the RBI now calculates four concepts of
money supply in India. These are known as Money
stock measures or measures of monetary
aggregates. The four concepts of money supply
o M1 = Currency with the public, i.e., coins and
currency notes + demand deposits of the
public; also known as narrow money.
o M2 = M1 + Post office savings deposits
o M3 = M1 + Time deposits of the public with banks:
M3 is known as broad money.
o M4 = M3 + Total post office deposits*
* People maintain fixed deposits of various maturities
with post offices, apart from savings deposits.
Money stock measures (as on March 31,2012):
amt in crores.
Sl no 1990-1991 2010-2011 2011-2012
1 Money supply with the people(M1) 92,890 16,35,569 17,298.7
2 Post office saving bank deposits* 4,210 5,041 50.4
3 M2(M1+Serial No.2) 97,100 16,40,610 17,349.1
4 Time deposits with banks 1,72,940 48,63,969 56,142.0
5 M3(M1+ Serial No.4) 2,65,830 64,99,548 73,440.7
6 Total post office deposits 14,680 25,969 259.7
7 M4(M3+ Serial No.6) 2,80,510 65,25,517 73,700.4
This above given table shows;-
The calculation of the four concepts of money supply with the
public, viz., M1, M2, M3 and M4.
Comparison of these figures for three years, viz., 1990-91,
2010-2011 and 2011-2012.
The broad money (M3) has been rising much faster than
narrow money (M1). This is because people are keeping bank
money increasingly in the form of time deposits.
.MONETARY POLICY IN
• Monetary policy sometimes works under conflicting
goals,ex-the desire to avoid inflation versus the desire to
boost output and employment.ex-central bank can fix
the reserves or it can set the interest rates on any one
class of debt instruments.it can exert influence on these
• USE OF MONEY AS AN
• The central bank can decide on the amount of‟money
supply‟ in a given year, but cannot directly set the
amount in the financial system;besides,it cant directly
control the volume of bank credit.
DEMAND FOR CENTRAL
• Central bank faces a new threat .long run factors,technological ones in
particular,reduce the effectiveness of monetary policy.these new
developments threaten to reduce the demand for central bank money
to a level where the central banks leverage over the monetary
system.electronics substitutes for cash become more widely available.
• IMPLICATIONS OF A DECLINING
DEMAND FOR BASE MONEY
• THE declining demand for base money causes major problems for central
bankers.first as base money less significant,it will gradually lose its
effeciveness as a channel through which the central bank can influence
the broader monetary system.
• Secondly the decline in the demand for base money would make price
and interest rates more vulnerable to external shocks and in particular to
change in the technological and other factors that influence the
demand for currency.
THE MONETARY POLICY
• The process of globalisation and liberalisation has necessitated
widening of the mandate of central banks.for their policies to be
effective ,monetary authorities are required to modify the way in
which they conduct monetary policies.central banks in emerging
markets also face similar issues.
• MONETARY POLICY AND INFLATION
• One of the most significant developments in the theory and
practice of monetary policy in he recent years has been inflation
targeting.The rationable for inflation targeting emerges as a joint
sequence as the joint consequence of two tools of monetary
policy.it can be either open market operation or the interest rate
the bank charges on advances.in case of short run there is
nothing monetary policy can do about either output or
• BANK RATE
The bank rate is the rate at which bank borrow from
RBI(reserve bank of india).it is also defined as the rate of
which reserve bank gives loans to banks by discounting
bills.any revision in the bank rate by the RBI is a signal to
banks to banks to revise deposit rates as well as prime
The repo rate is the rate at which RBI borrows from the
banks.this is also the floor rate at which overnight deals
are struck.besides lowering the cost of funds ,a lower
repo rate will see the emergency of a short term yeild
CRR AND SLR
. Crr is the cash revenue ratio which is the
percentage of net funds that commercial
banks have to park fortnightly with the RBI to do
business.lowering of crr means means that more
money comes into circulation.In addition to the
crr requirement banks are supposed o maintain
a certain percent of net deposits in the
govement seurities and similar instruments
specified.this is known as statutory liquidity
ratio(slr) which is 25% present.
• LIQUIDITY MANAGEMENT:
• The reserve bank modulates market liquidity
through a mix of repo operations.as a capital flows
persisted,the reserve bank portfolio necessited a
switch from out right OMO TO REPO operations.the
monetary policy operations has emerged as a key
instrument of liquidity management.
• INTEREST RATE POLICY
• The reserve bank continued to take policy
initiatives to impart a greater degree of flexibility to
the interest rate structure.it also follow credit policy.
Structure of Indian
Presenting by, Nagesha M R
The scheduled banks are those which are entered in
the second scheduled of RBI Act, 1934. Such banks are
those which have a paid-up capital and reserve of an
aggregate value of not less than Rs5 lakhs and which
satisfy RBI that their affairs are carried out in the
interest of their depositors.
• Commercial banks are based on profit.
• mobilize the savings in urban areas and make them available to large
and small industrial and trading units mainly for working capital
a) Public sector Banks:
b) Private sector Banks:
cooperative banks are based on cooperative principle.
Non scheduled Banks
Non-scheduled banks are those which have not been
included in the second schedule of RBI Act, 1934.
BANKING SECTOR REFORMS
No Bar To Set Up New Banks In Private Sector
No difference in treatment between public sector and private sector banks
Local banks should be confined to specific region and rural banks should
cater to the needs of rural areas
Banks should be authorised to recover bad debts through special tribunals
Public sector banks with profitable operations should be allowed to operate
in capital markets
Valuation of assets should be made by a panel consisting of atleast 2
Setting up of Asset Reconstruction Fund(ARF) and provided with special
powers of recovery
Abolishment of branch licensing
opening /closing of branches should be left to the individual judgement of
Setting up of a board for financial supervision
Need for Speedy computerization of banking sector
Ensure transparency in maintaining balance sheet
o Internal organisation of banks
o Permitting of joint ventures between foreign banks and Indian banks
o Adoption of liberal policies by RBI towards foreign banks
Reserve Bank of
India & its
Reserve Bank of India
• RBI was inaugurated in April 1935 with a share
capital of Rs. 5 crore
• Reserve Bank of India Act of 1934 provided for the
appointment by the Central Government.
• Consists Central Board of Directors of 20 members.
• Besides the Central Board, there are four local
boards with head quarters at Mumbai, Kolkata,
Chennai and New Delhi.
• RBI was nationalized in 1949.
Functions of Reserve
Bank of India
• Bank of Issue
• Banker to Government
• Bankers' Bank and Lender of the Last Resort
• Controller of Credit
• Custodian of Foreign Reserves
• Reserve bank has certain non-monetary
functions of the nature of supervision of banks
and promotion of sound banking in India.
• RBI wide powers of supervision and control over
commercial and co-operative banks.
• The RBI is authorized to carry out periodical
inspections of the banks.
• RBI have helped a great deal in improving the
standard of banking in India to develop and to
improve the methods of their operation.
• After Indian Independence, the range of the
Reserve Bank's functions has steadily widened.
• The Reserve Bank was asked to promote
banking habit, extend banking facilities to rural
and semi-urban areas, and establish and
promote new specialized financing agencies.
• Bank has helped in the setting up of the Industrial
Finance Corporation of India(IFCI) on July 1,
• It also set up the institutions to promote saving
habit and to mobilize savings, and to provide
industrial finance as well as agricultural finance.
• Narasimham Committee Report – 1991
The Narsimham Committee was set up in order to
study the problems of the Indian financial system
and to suggest some recommendations for
improvement in the efficiency and productivity of
the financial institution.
The committee has given the following major
• Reduction in the SLR and CRR : The committee
recommended the reduction of the higher
proportion of the Statutory Liquidity Ratio 'SLR' and
the Cash Reserve Ratio 'CRR'. Both of these ratios
were very high at that time. The SLR then was 38.5%
and CRR was 15%. This high amount of SLR and
CRR meant locking the bank resources for
government uses. It was hindrance in the
productivity of the bank thus the committee
recommended their gradual reduction. SLR was
recommended to reduce from 38.5% to 25% and
CRR from 15% to 3 to 5%.
• Phasing out Directed Credit Programme : In India,
since nationalization, directed credit programmes
were adopted by the government. The committee
recommended phasing out of this programme. This
programme compelled banks to earmark then
financial resources for the needy and poor sectors
at confessional rates of interest. It was reducing the
profitability of banks and thus the committee
recommended the stopping of this programme.
• Interest Rate Determination : The committee felt
that the interest rates in India are regulated and
controlled by the authorities. The determination of
the interest rate should be on the grounds of
market forces such as the demand for and the
supply of fund. Hence the committee
recommended eliminating government controls on
interest rate and phasing out the concessional
interest rates for the priority sector.
• Structural Reorganizations of the Banking sector : The
committee recommended that the actual numbers of
public sector banks need to be reduced. Three to four
big banks including SBI should be developed as
international banks. Eight to Ten Banks having
nationwide presence should concentrate on the
national and universal banking services. Local banks
should concentrate on region specific banking.
Regarding the RRBs (Regional Rural Banks), it
recommended that they should focus on agriculture
and rural financing. They recommended that the
government should assure that henceforth there won't
be any nationalization and private and foreign banks
should be allowed liberal entry in India.
• Establishment of the ARF Tribunal : The proportion of bad
debts and Non-performing asset (NPA) of the public
sector Banks and Development Financial Institute was
very alarming in those days. The committee
recommended the establishment of an Asset
Reconstruction Fund (ARF). This fund will take over the
proportion of the bad and doubtful debts from the
banks and financial institutes. It would help banks to get
rid of bad debts.
• Removal of Dual control : Those days banks
were under the dual control of the Reserve
Bank of India (RBI) and the Banking Division of
the Ministry of Finance (Government of India).
The committee recommended the stepping of
this system. It considered and recommended
that the RBI should be the only main agency to
regulate banking in India.
• Banking Autonomy : The committee
recommended that the public sector banks
should be free and autonomous. In order to
pursue competitiveness and efficiency, banks
must enjoy autonomy so that they can reform
the work culture and banking technology
upgradation will thus be easy.
• Some of these recommendations were later
accepted by the Government of India and
became banking reforms.