FISCAL AND MONETARY POLICIES (GHANA AND INDIA )

SEIDU Moro Email: gentlemoro@gmail.com 1
FISCAL AND MONETARY POLICIES
(GHANA AND INDIA )
By
SEIDU Moro
DEPARTMENT OF AGRICULTURAL ECONOMICS
COLLEGE OF AGRICULTURE,
CCS HAU
30th January, 2014

2
Overview of presentation
 Brief Background of Ghana and India
 Fiscal and Monetary Policies
 Principle
 Policy Makers
 Policy tools/ Instruments
 Objectives
 Limitation
 Comparison of Policy Impacts of Ghana and India in terms of
 Economic growth
 Price Stability
 Unemployment Rate
 Effect of tools on output indicators
 Major Policies Interventions adopted by Ghana & India
 Conclusion
 References
SEIDU Moro Email: gentlemoro@gmail.com

3
Background -Ghana
 Ghana, nation in West Africa, a former British colony
known as the Gold Coast until 1957. That year Ghana
became the first state in sub-Saharan Africa to gain
political independence from European colonial rule.
 Following independence, Ghana assumed the leadership
role in the African continent’s struggle for national
liberation.
 Ghana has one of the strongest economies in West
Africa, yet the country’s economic base continues to be
agriculture
 Gold mining, the production of cocoa (used to make
chocolate), and tourism are the main sources of
revenue.
 Major food crops: cassava, yam, maize, millet, rice
 Area -238500 sq. km.
 Population- 25.37million (2013)
 Capital – Accra
 Currency- Cedi (₵)

4
Background -India
India ranks second only to China among the world’s most
populous countries.
. The Indian economy heavily dependent on agriculture,
industry and services
Economic reforms in 1991 dramatically altered economic
policy to privatize state-owned enterprises and to promote
competition and investment.
The economic focus of the country has since changed from
one based on self-sufficiency to one based on trade with
other countries.
India’s most important crops include cotton, tea, rice, wheat,
and sugarcane.
Other important cash crops include jute, groundnuts, coffee,
oil seeds, and spices.
Another central feature of India’s agricultural economy is
the raising of livestock, particularly horned cattle, buffalo,
and goats.
Capital: New Delhi Area: 3165596 sq. km Pop:1.27bn

5
FISCAL & MONETARY POLICIES
Economic policy-makers are said to have two kinds of tools to
influence a country's economy: fiscal and monetary.
When these policies are used to stimulate the economy during a
recession, it is said that the government is pursuing expansionary
economic policies. And when they are used to contract the economy
during an overheated expansion, it is said that the government is
pursuing contractionary economic policies.

6
Fiscal Policies
 Meaning of Fiscal Policy
 Fiscal policy relates to government spending and revenue collection.
 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 )
 Principle of Fiscal Policy
 Manipulating the level of aggregate demand in the economy to achieve
economic objectives of price stability, full employment, and economic
growth.

7
Fiscal Policies
Policy Makers of Fiscal Policy
The legislative and executive branches of government control fiscal policy.
In Ghana, this is the President's administration and the Parliament that
passes laws.
Similarly in India the Prime Mister administration is in charge of fiscal
policies.
H.E. JOHN DRAMANI MAHAMA
H.E NARENDRA MODI

8
Fiscal Policies (Cont.)
Policy Tools
Revenue Budget
 Tax Revenue
 Direct Tax (e.g. Income & Corporate tax)
 Indirect Tax (central excise, VAT, service & custom tax)
 Non Tax Revenue (e.g. revenue from state natural resources)
 Public Debt
 Internal borrowing
 External borrowing
Expenditure Budget
 Consumption
 Investment

9
Objectives of fiscal policies
 To increase capital formation
 To Improve degree of growth
 To achieve desirable price level
 To achieve desirable level of consumption
 To achieve desirable level of employment
 To achieve desirable level of income distribution

10
Limitations of fiscal policies
 To increase capital formation
 Lack Of accurate Forecasting
 Delay in Decision
 Poor Tax Administration
 Inequality Of income
 Failure in Public Sector

Fiscal Policies of Ghana at a Glance
Government Revenue, Expenditure and deficits/surplus from1978 to 2008
10.1
5.2
14.1
14
15
13.1
14.5
13
14
17.5 17.1
18
9
14
18.6 19.1
20
26.5
22.4
24.9
23.8
28.6
-7.9
-3.8
0.1
-4.6 -4.1
-6.9
-12
-9.4
-10.9
-6.3
-11.5
-15
-10
-5
0
5
10
15
20
25
30
35
1978 1983 1988 1993 1998 2003 2008 2009 2010 2011 2012
GovernmentRevenue,Expenditureanddeficits/surplus(%
GDP)
Revenue
Expenditure
Deficit/Surplus

Fiscal Policies of India at a Glance
Government Revenue, Expenditure and deficits/surplus from 1988 to 2011

13
MONETARY POLICIES
Meaning of Monetary Policy
 Monetary policy is the process by which the monetary authority of a
country controls the supply of money, often targeting a rate of interest
to attain a set of objectives oriented towards the growth and stability of
the economy.
Principle of Monetary Policy
 Manipulating the supply of money as well as interest rates to influence
outcomes like economic growth, inflation, exchange rates with other
currencies and unemployment

MONETARY POLICIES (CONT.)
Policy Makers
 Monetary policy is controlled by the Central Bank. the organization is largely
independent and is free to take any measures to meet its dual mandate: stable
prices and low unemployment
 Bank of Ghana (BoG) - Ghana
 Reserve Bank of India (RBI)- India
Policy Making Tools
 Bank/Discount rate;
 Cash Reserve Ratio;
 Repo & Reverse Repo Rate;
 Statutory Liquidity Ratio;
 Open market operations;
 Moral Persuasion
14
Dr. D. Subbarao Dr. A.K. Henry Wampah

Policy Making Tools
 Bank /Discount rates
It is the rate at which the central bank of a country lends to the commercial
banks. If bank rate is increased, then commercial banks also charge higher
rate of interest on loans given by banks to public and vise versa. Higher
rate of interest will contract credit in the economy i.e. public will take
lesser loans because of higher rate of interest. The bank rate for India is
8.75% (October, 2013) & Ghana is 15.5% (2014)
 Cash Reserve Ratio
Is the percentage of bank deposits which banks are required to keep with
Central banks in the form of reserves or balances . By changing the CRR
requirement for banks, the Central bank can control the amount of lending
in the economy, and therefore the money supply. As of January 2013, the
CRR is 4.00 % and 9.00% for Ghana respectively
15

Policy Making Tools
 Repo Rate
Repo rate is the rate at which the Central bank 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. As of 2013, the
repo rate is 7.25 % (India) and 14.25% (Ghana)
Reverse Repo rate
This is exact opposite of Repo rate. Reverse Repo rate is the rate at which Central
bank borrows money from commercial banks. The Central uses this tool when it
feels there is too much money floating in the banking system. An increase in
Reverse repo rate can cause the banks to transfer more funds to central banks due to
these attractive interest rates.
As of August 2013, the reverse repo rate is 6.25 (India) and 13.5% (Ghana)

Policy Making Tools
 Statutory Liquidity Ratio; SLR
It is the amount a commercial bank needs to maintain in the form of cash, or gold
or govt. approved securities (Bonds) before providing credit to its customers. SLR
rate is determined and maintained by the Central bank in order to control the
expansion of bank credit. If SLR is more then banks have to keep more part of
deposits in specified securities and banks will have less surplus funds for granting
loans. It will contract credit. RBI usually fix SLR ranging between 24% to 39%.
However, the current SLR is 23% (India) and that of Ghana is 19.5%.

Policy Making Tools
 Marginal Standing Facility (MSF)
MSF is the rate at which scheduled banks could borrow funds overnight
from the Central bank against approved government securities. The basic
difference between Repo and MSF scheme is that in MSF banks can use
the securities under SLR to get loans from Central bank and hence MSF
rate is 1% more than repo rate.
 Open market operations
The Central bank can create money out of thin air and inject it into the
economy by buying government bonds (e.g. treasuries). This raises the
level of government debt, increases the money supply and devalues the
currency causing inflation. However, the resulting inflation supports asset
prices such as real estate and stocks.

Policy Making Tools
 Credit Ceiling
In this operation Central bank issues prior information or direction that
loans to the commercial banks will be given up to a certain limit. In this
case commercial bank will be tight in advancing loans to the public. They
will allocate loans to limited sectors.
 Moral Persuasion
Reserve bank can also exercise moral influence upon the members’ banks
with a view to pursue its monetary policy. RBI convinces banks to curb
loan to unproductive sectors. From time to time reserve bank holds
meetings with the member banks seeking their cooperation in effectively
controlling the monetary system of the country. It advices them to extend
more credit to priority sector.

Table 1: Summary of Policy tools (2013-…)
 Interest rates
Interest rate is the cost of borrowing or, essentially, the price of money. By
manipulating interest rates, the central bank can make it easier or harder to borrow
money. When money is cheap, there is more borrowing and more economic
activity.
NB: ALMOST ALL THE MONETARY POLICY MAKING TOOLS HAVE DIRECT OR
INDIRECT IMPACT ON INTEREST RATE
Rates / Reserve Ratios India Ghana
Bank Rate 8.75 % 15.5%
Repo Rate 8 % 14.25%
Reverse Repo Rate 7 % 13.5%
Cash Reserve Ratio (CRR) 4.00% 9%
Statutory Liquidity Ratio (SLR) 23% 19.5%
Marginal Standing Facility (MSF) 9% 15.25%

Objectives of Monetary Policies
 To achieve price stability
 To enhance adequate flow of credit to the productive Sectors of the
economy to support economic growth
 To encourage rapid growth
 To achieve full employment
 Balance of payment equilibrium
 Equal income distribution
21

Limitation of Monetary Policies
 Poor Banking Habit
 Underdeveloped Money Market
 Existence of Black Money
 Conflicting Objectives
 Lack of Coordination with Fiscal Policy
 Lack of Banking Facilities
 Limitations of Monetary Instruments
22

Basic Concept of Fiscal & Monetary Policies
Fiscal Policies
+
Monetary
Policies
Economic growth
+
Stable Prices
+
Full Employment

Comparison of F&M Policies
Impacts on The Economies of
Ghana and India

25SEIDU Moro Email: gentlemoro@gmail.com
35.5
37.4 39.4
42.5 44.44 48.27
54.86
60
31.13
34.2 35.99
61.97
75.9
1,805
2,200
2400
2,660
3,033
3,319
3,666
4,156
2,966
3,297
3,680
4,060
4,515
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
GDP(PURCHASINGPOWERPARITY)/BILLION$
Period/years
GDP (purchasing power parity) of India vrs Ghana
Ghana
India

0
2
4
6
8
10
12
14
16
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP-REALGROWTHRATE/%
TIME/YEARS
GROWTH RATE OF INDIA AGAINST GHANA
Ghana
India

12.8
22.8
25
14.5
26.7
13
15.1
10.9 10.7
16.5
19.3
10.9
8.7
7.9
7.4
0.47
3.48
5.16
3.2
3.72 3.78
5.57
6.53
5.51
9.7
14.97
9.47
6.49
11.17
11.08
0
3
6
9
12
15
18
21
24
27
30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Inflationrate(consumerprices)(%)
Period/ Years
Inflation rate of India vrs Ghana
Ghana
India

28
.
0
2
4
6
8
10
12
14
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Unemploymentrate(%ofLabourForce)
Period/years
Unemployment rate of India vrs Ghana
India
Ghana

14.5
6.2 6.2
5.7
4.4
6 6.2
7 7
4.25 4.28
6.1
8.3 8 7.75
24
27.5
22
18
12.5
12
13
17.1
18
13
12
15
16
0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Interestrate/%
Period/Years
Interest Rates of India vrs Ghana
India
Ghana

Effect of Policy tools on output
indicators

 Low savings
 Borrowing increases
 Increase in money supply
 Increase in Demand of goods
 Increase in business activities
 Increase in GDP Growth Rate
 Increase in the Average
income of people and
corporate
 Increase in Tax Revenue of
the government
 Decrease in fiscal deficit of
the government for the period
 Decrease in Value of domestic
currency
 Inflation Increases
 Increase in Exchange Rate
 Increase in Export of goods
 Increase in inflow of foreign
currency
 Decrease in Current Account
Deficit
Interest rate effect on Economy (Decrease)

32
.
0
2
4
6
8
10
12
14
16
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Interest Rate againt output indicator of India Economy (%)
Interest rate
Inflation
Unemployment
GDP

33
.
0
5
10
15
20
25
30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Interest Rate against output indicators of Ghana Economy (%)
Interest rate
Inflation
Unemployment
GDP

34
Some Fiscal and Monetary Policies
Intervention being adopted by India and
Ghana to arrest their current situation

35
India (Some F&M Policy Interventions)
 Stepping up Public Investment
 Reduction of repo rate under liquidity adjusted facility to 7.5% to 7.25%
 Reverse repo rate reduced from 7.0% to 6.25%
 MSF reduce from 9% to 8.25
 Bank rates still stands at 8.5% (used to be 9.0%)
 Cash Reserve Ratio (CRR) of scheduled banks retained at 4% (used to be
4.75%)of their net demand and time liabilities
 Allows FIIs to hedge their currency risk by using exchange traded currency
futures in the domestic exchanges
 Efforts to reduce supply bottle necks
 Introducing a long- term fixed interest rate loan products by banks
 Improving governance
 Improving government revenue collection
 Managing government expenditure

36
Ghana (Some F&M Policy Interventions)
 Achieving and maintaining inflation at single digits and maintaining it
for long period of time
 Reducing unemployment rate in the country
 Reducing Budget deficit
 By Increasing revenue collection
 to strengthen tax collection
 Widen the tax net
 Reducing government Expenditure
Cont…

37
Increasing revenue collection (By Strengthening its Collection)
Increase in the corporate tax rate from 25 % to 35 % on specified subsectors,
mostly in the Services sector (National Stabilization Levy)
Restructuring of revenue administration. E.g. integrating revenue services (IRS,
VAT, CEPS) under the Ghana Revenue Authority;
Streamlined tax exemption. The budget also limited the tax exemptions for real
estate developers to projects which provide affordable housing in partnership
with the Ministry of Water Resources, Works and Housing.
Reinforcing tax collection at the port and other key customs location using
computerized valuation systems and other automated procedures that limit
administrative discretion
Reinforcing the taxation of the self-employed.
SEIDU Moro Email: gentlemoro@gmail.com Cont…

38
Increasing revenue collection (By Widening Tax net)
 Review of the salary structure to bring down wage pressure
 Introduction of profit tax of 10 % for the mining sector
 Introduction of capital allowance of 20 % for five years in
the mining and oil and gas sectors.
 Extending the coverage of the communication service tax,
 Implementing new measures to tax the informal sector
amongst others
Cont…

39
Reducing government Expenditure
 Developing more realistic and strategic expenditure budgets, and the
reinstatement of quarterly ceilings for managing spending
 Efforts to address payment of arrears with the re-instatement of commitment
controls thus regularisation of the informal Debt
 Establishment of a comprehensive database to facilitate monitoring of
commitments.
 The Office of the President (in October 2010) mandating all MDAs to seek
authorisation through Commencement Certificates before committing
government to contractual obligations
 Government has also put in place a strategy for regularising payment arrears
by 2015 using a mix of bonds and cash
 Restructuring of the salary system to Single Spine Structure
Cont…

Conclusion
Relatively comparing the F & M Policies of India to Ghana the following are
Identified: The policy actions taken are expected to:
India
 Stabilise growth around its
current post-crisis trend
 Contain risks of inflation and
inflation expectations re-surging
 Enhance the liquidity cushion
available to the system.
 Stepping up Public Investment
 Try to recover an economic shock
or crisis
Ghana
 Reduce deficits and if possible
create surplus
 Ruduce inflation to achieve
single digit (price and currency
stabilty)
 Encourage savings of the public to
curtail the high money supply
 Still finding means to boost the
economy

41
Conclusion
Fiscal and Monetary policies are dynamic
process and occasionally adjusted to reflect
prevailing conditions.
Fiscal and Monetary policies can be effective in
managing economic growth both in the short run
and the long run.

42
References
Afonso, Antonio and Alegre, Juan G. (2008). Economic Growth and Budgetary Components: A
Panel Assessment for the EU. Working Paper series, European Central Bank, No 848.
http://www.iseg.utl.pt/departamentos/economia/wp/wp0292007deuece.pdf
Aryeetey E., Harrigan J. And Nissanke M. (2000). Economic Reforms in Ghana: The Miracle and
the Mirage. Woeli Publishing Service, Accra; James Currey, Oxford and; Africa World Press,
Trenton, NJ.
http://www.global-rates.com
http://www.hindustantimes.com
http://www.indexmundi.com
http://data.worldbank.org
http://currentaffairs-businessnews.com
http://trak.in
http://www.inflation.eu
http://www.tradingeconomics.com
http://en.wikipedia.org
http://www.riksbank.se
http://in.reuters.com
http://www.business-standard.com
http://www.bankofghana.gh
http://www.reservebankofindia.in

43
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FISCAL AND MONETARY POLICIES (GHANA AND INDIA )

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