Relationship between Employment generation and Monetary Policy: What is Monetary Policy. Objectives of Monetary Policy.

1. RELATIONSHIP BETWEEN
EMPLOYMENT GENERATION
AND
MONETARY POLICY
Submitted To: Submitted By:
Dr. M.S. Toor Saransh Gupta
L-2014-BS-35-MBA

2. MONETARY POLICY
Monetary policy refers to the use of officialinstruments under the control of
the central bank to regulate the availability, cost and use of money and
credit with the aim of achieving optimum levels of output, employment,
price stability and balance of payments equilibrium.
Monetary policy is now regarded as one of the most important tools of
economic management.
An appropriate monetary policy by adjusting money supply to the needs of
growth, directing the flow of funds in keeping with the overall economic
priorities, and providing institutional facilities forcredit in specific areas of
economic activity all combined creates a favourable environment for
economic growth.
OBJECTIVES OF MONETARY POLICY
Following are the main objectives of monetary policy in India :-
(i) Growth With Stability:
Traditionally, RBI’s monetary policy was focused on controlling inflation
through contraction of money supply and credit. This resulted in poor
growth performance.Thus, RBI have now adopted the policy of ‘Growth
with Stability’. This means sufficientcredit will be available for growing
needs of differentsectors of economyand at the same time, inflation will be
controlled with in a certain limit.
(ii) Regulation, Supervision And DevelopmentOf Financial Stability:
Financial stability means the ability of the economyto absorb shocks and
maintain confidencein financial system.Threats to financial stability can
come from internal and external shocks.Such shocks can destabilize the
country’s financial system.

3. Thus, greater importance is being given to RBI’s role in maintaining
confidence infinancial system through properregulation and controls,
without sacrificing the objective of growth. Therefore,RBI is focusing on
regulation, supervision and developmentof financial system.
(iii) Promoting Priority Sector:
Priority sectorincludes agriculture, export and small scale enterprises and
weaker section of population. RBI with the help of bank provides timely and
adequately creditat affordable costof weaker sections and low income
groups. RBI, along with NABARD,is focusing on microfinance through the
promotionof Self Help groups and other institutions.
(iv) GenerationOf Employment:
Monetary policy helps in employmentgeneration by influencing the rate of
investment and allocation of investment among various economic activities
of differentlabour Intensities.
(v) External Stability:
With the growth of imports and exports India’s linkages with global
economyare getting stronger. Earlier, RBI controlled foreignexchange
market by determining eaxchange rate. Now, RBI has only indirect control
over external stability through the mechanism of ‘managed Flexibility’,
where it influences exchange rate by buying and selling foreigncurrencies
in openmarket.
(vi) Encouraging Savings And Investments:
RBI by offering attractive interest rates encourage savings in the economy.
A high rate of saving promotes investment. Thus the monetary
management by influencing rates of interest can influence saving
mobilization in the country.
(vii) RedistributionOf income And Wealth:
By control of inflation and deploymentof credit to weaker sectors of society
the monetary policy may redistribute income and wealth favouring to
weaker sections.

4. (viii) Regulation Of NBFIs :
Non-banking Financial Institutions (NBFIs), like UTI, IDBI,IFCI plays an
important role in deploymentof creditand mobilization of savings. RBI does
not have any direct control on the functioning of such institutions. However
it can indirectly affects the policies and functions of NBFIs through its
monetary policy.
But India’s monetary policy seems to be in contradiction with
its objective of “Employment Generation”
Problems of reconciling objectives relating to output, employment,and
price level stability arise, however, when the supply of output does not
respond in such a favorable manner to increases of demand—when prices
rise before the economyhas neared its capacity to produce.Even in the
face of considerable amounts of unemployment, average money wage
rates may rise faster than average output per man-hour, thereby tending to
raise costs of production. And for this, or other reasons, business firms may
raise the prices of their products even though considerable amounts of
excess capacity persist.Under such conditions it may be impossible to
achieve all objectives,to acceptable degrees,solelyby controlling
aggregate demand. Levels of demand sufficientto elicit “full employment”
and capacity output may bring inflation, while levels of demand low enough
to assure stability of price levels may leave large amounts of
unemployment and unused capacity.
Because of such difficulties,many economists and other observers have
come to believe that objectives relating to output, employment,and price
levels can be reconciled satisfactorilyonly if regulation of aggregate
demand through monetary and fiscalpolicies is supplemented by measures
designed to elicit more favorable responsesby the economy.

5. These measures are of several types, which can only be listed here: (1)
reform of wage-making processesin order to avoid inflationary increases of
money wage rates, (2) decrease of monopolypower in industry, and (3)
increase of regional and occupational mobility of labor.
As stated by Nasser Munjee (Chairman, DevelopmentCredit Bank),
“Unemploymentcaused by our presentmonetary policy in the last 18
months is horrendous and the word unemployment doesn’teven appear in
the discussions we are having”
RBI needs to ease the monetary policy and focus on growth instead of
trying to tame inflation.
A lot of factories today in the corporate India are employing contract labour
who are just rendered unemployed as the slowdown has beaten our
economy.This in turn affects aggregate demand because as people et
unemployed or are scared of losing their jobs, they are not going to spend
their money and this causes a huge decline in the Indian economyand that
is the fundamental cause of loss of confidencein the economyand its
policy paradigms.
Monetary policy should involve cutting interest rates. Lower rates decrease
the cost of borrowing and encourage people to spend and invest. This will
increase aggregate demand and will also help to increase GDP and reduce
demand deficientunemployment.