This document discusses economic policy, specifically monetary and fiscal policy. It defines economic policy as a set of instruments used by the government to achieve predetermined objectives. Monetary policy objectives include providing necessary finance for economic development, full employment, and price stability. Key monetary policy instruments are bank rate, open market operations, cash reserve ratio, and statutory liquidity ratio. Fiscal policy objectives are to mobilize resources for growth, raise savings and investment, and control inflation. Important fiscal policy tools include government expenditure, taxation (direct and indirect), subsidies, deficit, and debt management.

1. ECONOMIC POLICY- MONETARY AND FISCAL
DR. SK LAROIYA
UNIV OF DELHI
AND
AMITY BUSINESS SCHOOL

2. ECONOMIC POLICY
A SET OF INSTRUMENTS USED BY THE GOVERNMENT TO ACHIEVE ITS PRE-DETERMINED SET OF OBJECTIVES (OBJECTIVE FUNCTION) IS TERMED AS ECONOMIC POLICY

3. ECONOMIC POLICY..CONTD
THE IMPACT OF ECONOMIC POLICY IS ALWAYS ANALYZED IN THE FRAMEWORK OF MACRO- ECONOMIC ENVIRONMENT – GENERAL EQUILIBRIUM

4. ECONOMIC POLICY..CONTD
ECONOMIC POLICY IS NECESSARILY A
SECOND BEST APPROACH

5. ECONOMIC POLICY..CONTD
ECONOMIC POLICY IS ALWAYS SUBJECT TO TWO CONSTRAINTS:
•RESOURCE CONSTRAINT
•POLITICAL CONSTRAINT

6. ECONOMIC POLICY..CONTD
•THE FIRST CONSTRAINT IS RELAXABLE
•THE SECOND ONE IS BINDING

7. ECONOMIC POLICY..CONTD
THIS LEADS TO CONSTRAINED MAXIMIZATION OF THE OBJECTIVE FUNCTION OF ECONOMIC POLICY

8. WHY ECONOMIC POLICY ?
•MARKET IMPERFECTIONS
•DISTORTIONS
•EXTERNALITIES
•INCOME DISTRIBUTION

9. ANALYSIS
•WHILE ANALYZING THE EFFICACY OF ECONOMIC POLICY, WE MUST FOCUS ON
•OBJECTIVES
•INSTRUMENTS
•MECHANISM
•UNDERLYING ASSUMPTIONS AND LIMITATIONS

10. ANALYSIS..CONTD
AN APPROPRIATE POLICY MIX – OPTIMAL POLICY MIX MUST BE DESIGNED SO THAT ECONOMY IS MANAGED EFFICIENTLY

11. VARIANTS OF ECONOMIC POLICY
•FISCAL POLICY
•MONETARY POLICY
•WAGE POLICY

12. ANALYSIS
•MAXIMIZING ECONOMIC GROWTH
•FULL EMPLOYMENT
•PRICE STABILITY
•BALANCE IN BALANCE OF PAYMENTS
•SOCIAL JUSTICE

13. OBJECTIVES OF ECONOMIC POLICY.. CONTD
•COMPATIBILITY/INCOMPATIBILITY AMONG THE POLICY OBJECTIVES
•THE CONCEPT OF TRADE OFF
•RANGE OF TRADE OFFS

14. MONETARY POLICY
OBJECTIVES:
 TO PROVIDE NECESSARY FINANCE TO VARIOUS INVESTORS THROUGH EFFICIENT BANKING SYSTEM FOR ECONOMIC DEVELOPMENT
FULL EMPLOYMENT
PRICE STABILITY
STABILITY OF EXCHANGE

15. MONETARY POLICY ..CONTD
 CONTROL OF BUSINESS CYCLES
 ECONOMIC GROWTH

16. THERE ARE FOUR MAIN “CHANNELS” WHICH THE RBI LOOKS AT:
1. QUANTUM CHANNEL:
MONEY SUPPLY AND CREDIT ( AFFECTS REAL OUTPUT AND PRICE LEVEL THROUGH CHANGES IN RESERVE MONEY, MONEY SUPPLY AND CREDIT AGGREGATES

17. 2. INTEREST RATE CHANNEL
3. EXCHANGE RATE CHANNEL 9 LINKED TO CURRENCY)
4. ASSET PRICE

18. IMPACT OF MONETARY POLICY:
1.CHANGE IN CRR ON INTEREST RATES
2.CHANGE IN SLR AND GILT PRODUCTS ON INTEREST RATES
3.ON DOMESTIC INDUSTRY AND EXPORTERS
4.ON STOCK MARKETS AND MONEY SUPPLY
5.ON EMPLOYMENT, WAGES AND OUTPUT

19. ALTERNATIVE DESIGNS OF MONETARY POLICY
MONETARY POLICY DESIGN
DESCRIPTION OF THE POLICY
RESTRICTIVE MONETARY POLICY
SEEKS TO CONTROL AGGREGATE DEMAND WITH THE BASIC PURPOSE TO CONTROL INFLATION
EXPANSIONARY MONETARY POLICY
SEEKS TO STIMULATE AGGREGATE DEMAND TO BOOST THE ECONOMY
CONTRA CYCLICAL MONETARY POLICY
SEEKS TO EXPAND AND RESTRICT AGGREGATE DEMAND ALTERNATIVELY TO CONTROL BUSINESS CYCLES
RULE BASED MONETARY POLICY
ACTIONS ARE BASED ON PREDETERMINED SET OF RULES FOR DIFFERENT SITUATIONS
DISCRETIONARY MONETARY POLICY
PROVIDES DISCRETION TO CENTRAL BANKING AUTHORITIES IN MONETARY POLICY ACTIONS. ACTION IS TAKEN ACCORDING TO THE EXIGENCIES OF THE EMERGING SITUATION

20. INSTRUMENTS OF MONETARY POLICY
QUANTITATIVE CONTROLS
 BANK RATE
 OPEN MARKET OPERATIONS
 CASH RESERVE RATIO
 SLR- BANKS IN INDIA ARE REQUIRED TO MAINTAIN 25% OF THEIR DEMAND AND TIME LIABILITIES IN GOVERNMENT SECURITIES AND CERTAIN APPROVED SECURITIES. THESE ARE COLLECTIVELY KNOWN AS SLR SECURITIES. THE BUYING AND SELLING OF THESE SECURITIES LAID THE FOUNDATIONS OF HARSHAD MEHTA SECURITY SCAM OF 1992

21. INSTRUMENTS OF MONETARY POLICY .. CONTD
SELECTIVE OR QUALITATIVE CONTROLS:
MARGIN REQUIREMENTS
CONTROL THROUGH DIRECTIVES
REGULATION OF CONSUMER CREDIT
RATIONING OF CREDIT
DIRECT ACTIONS

22. FISCAL POLICY
ECONOMIC DEVELOPMENT ISSUES AND FISCAL POLICY-
AN INDIAN EXPERIENCE

23. OBJECTIVES OF FISCAL POLICY:
1.TO MOBILIZE ADEQUATE RESOURCES FOR FINANCING VARIOUS PROGRAMS AND PROJECTS FOR ACHIEVING TARGET RATE OF ECONOMIC GROWTH/ DEVELOPMENT
2.TO RAISE THE SAVINGS AND INVESTMENT FOR INCREASING THE RATE OF CAPITAL FORMATION
3.TO PROMOTE NECESSARY DEVELOPMENT IN THE PRIVATE SECTOR THROUGH FISCAL INCENTIVE

24. 4. TO ARRANGE OPTIMUM UTILIZATION OF RESOURCES
5. TO CONTROL INFLATIONARY PRESSURE IN THE ECONOMY IN ORDER TO ATTAIN ECONOMIC STABILITY
6. TO REDUCE REGIONAL DISPARITIES
7. TO REDUCE THE DEGREE OF INEQUALITY IN THE DISTRIBUTION OF INCOME AND WEALTH

25. COMPONENTS OF FISCAL POLICY
GOVERNMENT EXPENDITURE
GOVERNMENT REVENUE
DIRECT TAXES
INDIRECT TAXES
SUBSIDIES
DEFICIT
DEBT MANAGEMENT

26. DIRECT TAXES
PERSONAL INCOME TAX:
TAX IMPOSED ON THE INCOME OF AN INDIVIDUAL WHICH IS DERIVED FROM VARIETY OF SOURCES
IT COULD BE REGRESSIVE, PROGRESSIVE OR PROPORTIONAL

27. CORPORATION TAX:
THE TAX IMPOSED ON THE ASSESSABLE PROFITS OF THE COMPANIES AND UNINCORPORATED ASSOCIATIONS
GENERALLY CALCULATED AFTER INTEREST BUT BEFORE DIVIDEND DISTRIBUTION
COMPANIES ALSO LIABLE TO PAY CAPITAL GAINS TAX

28. INHERITANCE TAX:
THE TAX ON THE TRANSFER OF WEALTH ON THE DEATH OF THE DECEASED INDIVIDUAL TO THE OTHERS LIVING
ALSO CALLED AS DEATH DUTY OR ESTATE DUTY

29. WEALTH TAX:
TAX PAID ON THE SPECIFIED STOCK OF ASSETS HELD BY AN ECONOMIC UNIT THAT YIELDS OR HAS POTENTIAL TO YIELD INCOME IN SOME FORM

30. INDIRECT TAXES
EXCISE DUTY:
THE TAX LEVIED ON THE PRODUCTION OF GOODS
LEVIED BY CENTRAL GOVERNMENT IN INDIA

31. VAT- VALUE ADDED TAX:
A GENERAL TAX APPLIED AT EACH POINT OF EXCHANGE FROM PRIMARY PRODUCTION TO FINAL CONSUMPTION
ASSESSED AND IMPOSED ON THE DIFFERENCE BETWEEN THE SALE PRICE OF GOODS OR SERVICES (OUTPUTS) TO WHICH THE TAX IS APPLIED AND THE COST OF GOODS AND SERVICES (INPUTS) BOUGHT IN ITS PRODUCTION
THE COST OF THE INPUTS INCLUDE ALL THE CHARGES INCLUDING THE TAXES (EXCEPT VAT ITSELF)

32. CUSTOM DUTY
SALES TAX
SERVICE TAX

33. NECESSARY REFORMS IN FISCAL POLICY- A FEW RELEVANT ISSUES
1.PROGRESSIVE TAXES
2.AGRICULTURAL TAXATION
3.BROAD BASED TAX NET
4.CHECKING TAX EVASION
5.INCREASING RELIANCE ON DIRECT TAXES
6.SIMPLIFICATION OF TAX STRUCTURE
7.REDUCTION IN NON-DEVELOPMENTAL EXPENDITURE
8.CHECKING BLACK MONEY
9.RAISING PROFITABILITY OF PSUs

34. 9. RATIONALIZATION OF DIRECT TAX RATES
10. REFORMS IN INDIRECT TAXES – GST ETC.
11. CONTROL OF GOVERNMENT EXPENDITURE
12. RATIONALIZATION AND REDUCTION IN GOVERNMENT SUBSIDIES
13. REDUCTION IN FISCAL DEFICIT
14.REDUCTION IN PUBLIC DEBT
15. DISINVESTMENTS IN THE PUBLIC SECTOR