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Monetary policy
- 1. MANAGERIAL ECONOMICS MONETARY POLICY
- 2. MONETARY POLICY • Monetarypolicy deals with the total money supply and its management in an economy. It is essentially a program of action undertaken by central bank of a country to control and regulate the supply of money with the public and the flow of credit with a view to achieve economic goals.
- 3. MONETARY POLICY OBJECTIVES •Price stability • Exchange rate stability • Avoidance of negative impact of business cycle • Achievement of full employment • Adequate flow of credit to various productive sectors • Contd…
- 4. MONETARY POLICY OBJECTIVES Contd… • Financial stability • Rapid economic growth • BOP equilibrium • Equal income distribution
- 5. INSTRUMENTS • Bank Rate • Cash Reserve Ratio (CRR) • Statutory Liquidity Ratio (SLR) • Open Market Operations • Margin requirements • Credit Rationing • Moral Suasion • Direct actions
- 6. LIMITATIONS OF MONETARYPOLICY MEASURES • Existence of non-monetized sector (unbanked, barter transactions) • Excess non-banking financial institutions (not coming under monetary policy) • Existence of unorganized financial markets (Rural money lenders) • Excess liquidity (rapid economic growth, deposits keep increasing, excess liquidity cannot be sucked) • Monetary and Fiscal Policies lack co-ordination
- 7. MONETARY POLICY IN2011-12 • Inflation pressures in I half year • Up to mid Dec. 2011, monetary policy stance continued to be tight • By Dec. 2011, inflationary level started easing but, domestic growth started slowing down • Policy rates were kept at a pause during the reminder of the year
- 8. MONETARY POLICY IN2012-13 • Growing evidence of slowdown in economy • SLR was reduced in July 12 to provide liquidity to facilitate availability of credit to productive sectors • CRR was cut • RBI resorted to open market operations • April 2011 to November 2011 WPI inflation at 9.7% • Non-food inflation 7.7% as against 4% during the last 6 years • Repo rate increased 5 times totaling 175 basis point • Inflation continues to be above comfortable level
- 9. MOVEMENTS IN KEYPOLICY VARIABLES • Effective Repo Rate CRR SLR • May 3, 2011 7.25 (+0.50) 6 24 • June 16, 2011 7.50(+0.25) 6 24 • July 26, 2011 8.00 (+0.50) 6 24 • Sept.16, 2011 8.25(+0.25) 6 24 • Oct. 25, 2011 8.50(+0.25) 6 24 • Jan.28, 2012 8.50 5.50(-0.50)24
- 10. MOVEMENTS IN KEYPOLICY VARIABLES Contd… • Effective Repo Rate CRR SLR • Mar.10, 2012 8.50 4.75(-0.75)24 • Apr.17, 2012 8.00(-0.50)4.75 24 • June 18, 2012 8.00 4.75 24 • Aug.11, 2012 8.00 4.75 23 (- 1) • Sept.22, 2012 8.00 4.50(-0.25) • Nov.3, 2012 8.00 4.25(-0.25)
- 11. FISCAL POLICY • Fiscalpolicy is defined as the conscious attempt of the government to achieve certain macro economic goals by altering the volume and pattern of its revenue and expenditure
- 12. OBJECTIVES OF FISCALPOLICY • Economic stability • Price stability • Full employment • Social justice • Export promotion • Import substitution • Mobilization of more public revenue • Allocation of available resources • Balanced regional growth
- 13. INSTRUMENTS • Taxation • Publicborrowing • Deficit financing
- 14. CLASSIFICATION OF EXPENDITURE •Capital expenditure • Consumption expenditure
- 15. TYPES OF EXPENDITURE • Construction of roads, dams, etc. • Establishment expenses • Interest payments • Transfer payments
- 16. BUDGET 2012-13 • KEYFEATURES • GDP estimated to grow by 6.9% during 2011- 12 as against 8.4% in the preceding 2 years • Growth moderated • Fiscal balance deteriorated due to tight monetary policy and expanded outlays • Manufacturing sector under recovery phase
- 17. BUDGET ESTIMATES 2012-13 • Gross tax receipts 10,77,612 cr • Net tax to Centre 7.71,071 cr • Non-tax revenue receipts 1,64,614 cr • Non-debt capital receipts 41,650 cr • Total expenditure 14,90,925 cr • Plan expenditure 5,21,025 cr • Non-plan expenditure 9,69,900 cr • Transfer to States 3,65,216 cr • Fiscal deficit reduction from 5.9% to 5.1% of GDP
- 18. MAJOR TAX PROPOSALSON DIRECT TAXES • Exemption limit for individual tax payers enhanced from Rs. 1.80 lacs to Rs.2 lacs • Upper limit of 20% tax slab raised from Rs. 8 lacs to Rs. 10 lacs • Interest income from Savings Bank Account exempted from tax up to Rs.10,000/
- 19. ECONOMIC ENVIRONMENT AND TRANSITION IN INDIA • INTRODUCTION • Economic growth is the foremost objective of macroeconomic policies • Higher the economic growth, higher the national income • Higher national income will help solve problems of poverty, unemployment, inflation and international trade
- 20. SOURCES OF ECONOMICGROWTH AND DEVELOPMENT • ECONOMIC FACTORS • Natural resources • Human resource and population growth • Capital formation • Technological progress • Entrepreneurship • Investment policies • Removal of market imperfections (reducing monopoly market) • Capital output ratio
- 21. SOURCES OF ECONOMICGROWTH AND DEVELOPMENT Contd… • NON-ECONOMIC FACTORS • Desire for development • Widespread education • Social and industrial reform • Good governance
- 22. BARRIERS TO FASTERECONOMIC GROWTH • Low productivity • Infrastructure deficiencies • Rising public debt • High subsidies fostering inefficiency • Low literacy levels • Demographic deficiencies • Rigid labor laws • Functioning of judicial system • Campaign against consumerism • Corruption
- 23. GROWTH POTENTIAL • Large potential market • Booming IT and Bio-tech sectors • High professional and scientific manpower • Trend towards political decentralization • Dominant player in South Asian region • Competitive environment
- 24. LIBERALISATION, PRIVATISATION AND GLOBALISATION (LPG) • NEED FOR LIBERLISATION • Low economic growth • Low per capita income • Less than 1% share in world trade • Trade deficit • Heavy government borrowing • Inefficiency in use of resources • Contd…
- 25. LIBERALISATION, PRIVATISATION AND GLOBALISATION (LPG) Contd… • NEED FOR LIBERLISATION Contd… • Mismanagement of economy • PSU losses • Poor technological development • Shortage of foreign exchange • Burden of national debt • Inflationary pressures
- 26. LIBERALISATION • Disinvestment • De-licensing •FDI allowed up to 51% • No permission required for hiring foreign professionals • BIFR for PSUs • Greater autonomy to PSUs • Economy opened up • Contd…
- 27. LIBERALISATION Contd… • Deregulation and liberalization of the industries • Lowering of tariffs and easing of import licensing requirements • Export incentives • Promotion of SEZs • Single window licensing policy • Declining incidence of poverty • Divestment of PSUs • Contd…
- 28. LIBERALISATION Contd… • Liberalization of banking and financial sectors • Promotion of FDI • Tax incentives for capital investments • Managed exchange rate in place of controlled exchange rate • Portfolio investment strengthened
- 29. WEAKNESSES OF LPGMODEL • Narrow focus • Free entry of MNCs • Agricultural sector bypassed • Facilitated more imports • Capital intensive development
- 30. PRIVATISATION • Sale ofpart of nationalized industries to the private sector • Sale of individual assets of government bodies to private sector • Creation of competitive spirit of the private sector to the state enterprises • Disinvestment – disposal of equity in PSUs to private sector
- 31. ARGUMENTS IN FAVOUROF PRIVATIZATION • Reduction in cost of production due to productive efficiency • Quality enhancement due to R & D • Innovation • Invisible hand of the market ensuring optimal allocation of resources • Widening of share ownership • Reduction in public borrowing and state spending
- 32. GLOBALIZATION • Globalization meansintegrating the domestic economy with the world economy • Globalization is a process of integration of the world into one market by removal of all the political, geographical trade and business barriers among nations.
- 33. STEPS TO OVERCOMECHALLENGES OF GOBALIZATION • Human resources development • Enhancing quality of products • Improving marketing strategies • Attracting FDI • Improving good governance • Evolving risk management strategies
- 34. EFFECT OF GLOBALIZATIONON INDIVIAN ECONOMY • India’s share in world export increased from 0.53% in 1950 TO 1% in 2005 • Foreign exchange reserve improved • Export growth rate increased (Maximum of 20% per annum) • Reduction in current account deficit (3% to 1.1%) • Reduction in external debt crisis
- 35. UPSHOT OF GLOBALIZATION • Unprecedented economic growth • Multi-locational manufacturing • Surge in international trade • Explosive growth in capital movements • Increase in labor movement • Emergency of cultural commonalities