Fiscal And Monetary Policy Of India 59366o

Monetary & Fiscal Policies of INDIA Somya Agrawal Amish Daniel Nikhil Girme Priyesh Agrawal Siddhartha Das Sneha Bhadoria

(09020541004) (09020541008) (09020541022) (09020541042) (09020541047) (09020541054)

Fiscal Policy??? 

Fisc-> State Treasury

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Fiscal Policy-> use of government finances

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Objectives…………..

→To achieve macroeconomic goals 

→Relating to any typical problem

Macroeconomic Goals!!!

BUDGET 

“A budget is a detailed plan of operations for some specific future period” 

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Components of budget  Revenue receipts  Capital receipts  Revenue expenditure  Capital expenditure

Revenue Receipts

Capital Receipts

Revenue Expenditure

Capital Expenditure

Instruments of Fiscal Policies

Government Expenditure  Government

spending on the purchase of goods & services.

  Payment

of wages and salaries of government servants

  Public investment   Transfer payments

Government Expenditure

Government Expenditure

Taxation 

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Non quid pro quo transfer of private income to public coffers by means of taxes.

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1.

Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax 2. Indirect taxes- Central Sales Tax, 

Direct Tax

Indirect Tax

Tax Slabs(09-10) Table : New Proposed Tax Slabs Individua Tax Rate Existing Income Slab ls (Rs) Nil Up to Rs 1,60,000* 10% 1,60,001 – 3,00,000 20% 3,00,001 – 5,00,000 30%

Over 5,00,000

Proposed Income Slab Up to(Rs) Rs 1,60,000* 1,60,001-10,00,000 10,00,001-25,00,000 Over 25,00,000

* Minimum slab changes to Rs 1.9 lakhs for women and Rs 2.4 lakhs for senior citizens

Taxation Contd…..  The

Tax system has been modernized considerably.

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 Eliminating

exemptions and loopholes for both direct and indirect taxes would level the playing field, reduce distortions and make the system simpler for both tax payers and the istration.

Public Debt  Internal

borrowings

1.Borrowings from the public by means of treasury bills and govt. bonds 2.Borrowings from the central bank (monetized deficit financing)   External

borrowings 1.Foreign investments 2.International organizations like World Bank & IMF 3.Market borrowings 

Budgetary Surplus & Deficit  Early

1980s:net of depreciation consistently negative.  Late 1980s:large deficit averaging about 8% of GDP  Post liberalization: Fiscal deficit decreased.  LPG effect was till 1996-1997  2001:Fiscal deficit increased to 10% of GDP. 

Budgetary Surplus & Deficit  2003:FRBM was adopted.  FRBM improved the transparency

in

budgetary policy.  As a result fiscal deficit decreased to 3.7% of GDP.  In 2007-2008 fiscal deficit was 2.7 %  Shot up to 6 % in 2008-2009. 

Fiscal Deficit(as % of GDP)

Fiscal Deficit (in crores of Rs.)

Fiscal Policy Overview (2009-10)  Budget

2008-09 presented in the backdrop of impressive growth.  Fiscal deficit 2009-10 estimated at 2.5 per cent of GDP  After presentation of budget Indian economy was hit by global crisis.  Fiscal policy shifted from fuelling growth to containing inflation, which had reached 12.9 per cent in August, 2008.  Stimulus package of Rs .1,50,320 crore was provided

Tax Policy Customs: 1.Sharp reduction was effected in the import duty rates of various food items. 2.Import duties on crude petroleum was reduced to nil and on petrol and diesel to 2.5% (earlier 7.5%). 

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Excise: Reduction of 4 %points in the ad valorem rates of excise duty on non-petroleum items.

Service tax: 1.Service Tax continued at 10%. 2.Tax base widened. 

Government Borrowings, Lending and Investments  The

gross borrowings: Rs 2,40,167 crore

  The net borrowings : Rs 1,68,710   An Overdraft (OD) for 24 days daily

average of OD was Rs.11,233 crore.   Government

has set up National

Policy Evaluation  Fiscal

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act.

consolidation during the FRBM

 2007-08:fiscal

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deficit was 2.7%.

 Increase

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in fiscal deficit due to global meltdown (10.3% of GDP).

 Government

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steps helped reduce inflation(7.8%).

 India

still growing at the rate of 6.7%(08-09)

Monetary Policy?? 

The part of the economic policy which regulates the level of money in the economy in order to achieve certain objectives.

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In INDIA,RBI controls the monetary policy. It is announced twice a year, through which RBI,regulate 1.Slack season April-September the price stability policy for the economy. 2.Busy season October-March policy

Central Banks  In d ia  U.S.A.

R e se rve B a n k o f In d ia . Federal Reserve bank.

U.K.

Bank of England.

Pakistan

Bank of Pakistan.

Establishment of RBI  Established

in April 1935 with a share capital of Rs. 5 crores.

Nationalized

in the year 1949.

Initially

established in Calcutta but permanently moved to Mumbai in 1937.

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Governor of RBI : D. Subbarao

Objectives of monetary policy  Maximum feasible output.  High rate of growth.  Growth in employment & income  Price stability.  Stability of Forex & national currency  Inflation Control  Greater equality in the distribution of income

and wealth.  Healthy balance in balance of payments(BOP). 

Types of control

Quantitative control Tools 

Open market operations:

The open market operations is sale and purchase of government securities and Treasury Bills by the central bank of the country.  When the central bank decides to pump money into circulation, it buys back the government securities, bills and bonds.  When it decides to reduce money in circulation it sells the government bonds and securities.  The central bank carries out its open market operations through the commercial banks. 

OMO ’ s Tools Repo rate:  A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities.  Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.

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Reverse repo rate is the rate that RBI offers the banks for parking their funds with it. Reverse repo operations suck out liquidity from the system.

Bank Rate Policy 

Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.

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 Dear money 

policy: Bank rate inc interest rate inc borrowing will be less profitable results contraction of credit.

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 Near money 

policy: Bank rate dec interest rate low borrowing will be more profitable results expansion of credit.

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Trends of Bank Rate

In 1940 ’ s BR was at low 3 % and remained unchanged till 1953 . In 1953 RBI adopted policy controlled expansion BR raised to 3 . 5 %. It reached at max . level in 1991 to 12 %. Presently it is

Reserve Requirements Changes: 

The central bank of a country is empowered to determine within statutory limits, the cash reserve requirements of the commercial banks.

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 Statutory

liquid ratio:  Bank has to keep portion of total deposits with itself in liquid assets.  Cash reserve ratio:  The percentage of bank’s deposits which they must keep

SLR Trend It was 25% in 1949 after that it increased continuously 32%(1972)--- 35% (1981)---36%(1984)--38%(1988). From 1997 it is constant at 25%

CRR Trend In beginning it was 5% of demand deposit & 2% of time deposits. Reached max. in 1991,92 after 1993 it followed Narsimham report & decreased. But from dec.06 it raised 7 times, 250bp to cool credit growth & supply.

Currently, it is 5 %

Qualitative Control Tools: o Selective credit control o o They are distinguishable from quantitative tools by the fact that they are directed towards particular uses of credit and merely to total volume outstanding. o Important selective control measures are:

o

 Rationing of credit.  Changes in margin requirements.  Moral suasion.

Credit Rationing When

there is a shortage of institutional credit available for the business sector, the large and financially strong sectors or industries tend to capture the lion’s share in the total institutional credit. As a result the priority sectors and essential industries are of necessary funds. 

Below two measures are generally adopted: Imposition of upper limits on the credit available to large industries and firms Charging a higher or progressive interest rate on the bank loans beyond a certain limit. 

Change in Lending Margins  §The

banks provide loans only up to a certain percentage of the value of the mortgaged property.

§ §The

gap between the value of the mortgaged property and amount advanced is called Lending Margin.

§ §The

central bank is empowered to increase the lending margin with a view to decrease the bank credit.

Moral Suasion  The

moral suasion is a method of persuading and convincing the commercial banks to advance credit in accordance with the directives of the central bank in overall economic interest of the country.

 Under

this method the central bank writes letter to hold meetings with the banks on money and credit matters.

EXPANSIONARY MONETARY POLICY Problem:

unemployment Measures: securities

Recession and (1) Central bank buys

open market operation cash reserves ratio      

the bank rate supply increases Investment increases

through (2) It reduces (3) It lowers Money

CONTRACTIONARY MONETARY POLICY Problem: Measures:

Inflation

(1) Central bank sells securities through open market operation (2) It raises cash reserve ratio and statutory liquidity (3) It raises bank rate (4) It raises maximum margin against holding of stocks of goods decreases

 

raises expenditure declines

Money supply Interest rate Investment

Recommendation of Narshimham Committee Nov.1991

SLR should not be used for directed investment in PSUs. It should be lower down to minimum limit of 25% CRR should be lower than the present rate. As an instrument it should be used less & Govt. should depend upon OMOs.  Selective credit control should be slowly phased out §Prime lending rate of commercial bank should be independent of RBI control

How Monetary Policy Controls Inflation? CENTRAL BANK

CASH

SE I N C % RR

CASH RESERVE RATIOSTATUTORY LIQUID RATIO G DIN LEN SE REA RATE INC

SO LD

RATE

INCR EA

SECURITIES AND TRESURY BILLSBANK

COMMERCIAL BANKS REDUCED BORROWING OF LOANS

CORPORATES

REDUCE LIQUIDITY IN MARKET

INDIVIDUALS

Monetary Policy of India - Overview The Monetary Policy aims to maintain price stability, full employment and economic growth. Emphasis on these time depending on

objectives prevailing

have been changing time to circumstances.

For explanation of monetary policy, the whole period has been divided into 4 sub periods: a) Monetary policy of controlled expansion (1951 to 1972) b) Monetary Policy during Pre Reform period (1972 to 1991) c) Monetary Policy in the Post-Reforms (1991 to 1996) d) Easing of Monetary policy since Nov 1996

Monetary policy of controlled expansion (1951 to 1972) To regulate the expansion of money supply and bank credit to promote growth. To restrict the excessive supply of credit to the private sector so as to control inflationary pressures. Following steps were taken: 1.Changes in Bank Rate from 3% in 1951 to 6% in 1965 and it remained the same till 1971. 2. 3.Changes in SLR from 20% in 1956 to 28% in 1971. 4. 5.Select Credit Control: In order to reduce the credit or bank loans against essential commodities, margin was increased.

Monetary Policy during Pre Reform period (1972 to 1991) Also known as the Tight Monetary policy: Price situation worsened during 1972 to 1974. Following Monetary Policy was adopted in 70’s and 80’s which were mainly concerned with the task neutralizing the impact of fiscal deficit and inflationary pressure. 1)Changes in CRR to the maximum limit of 25% 2)Changes in SLR also to the maximum limit of 38.5%

Monetary Policy in the Post-Reforms – 1991 to 1996 The year 1991-1992 saw a fundamental change in the institutional framework It had twin objectives which were Price stability and economic growth. 1)Continuing the same maximum CRR and SLR of 25% and 38.5%, mopped up bank deposits to the extent of 63.5% 2) 2) In order to ensure profitability of banks, Monetary Reforms Committee headed by late Prof. S Chakravarty, recommended raising of interest rate on Government Securities which activated Open Market Operations (OMO). 3) Bank rate was raised from 10% in Apr 1991 to 12% in Oct 1991 to control the inflationary pressures.

Easing of Monetary policy since Nov 1996: In 1996-97, the rate of inflation sharply declined. In the later half 1996-97, industrial recession gripped the Indian economy. To encourage the economic growth and to tackle the recessionary trend, the RBI eased its monetary policy. 1.Introduction of Repo rate. Repo rate increased from 3% in 1998 to 6.5% in 2005. This instrument was consistently used in the monitory policy as a result of rapid industrial growth during 2005-06. 2. 3.Reverse Repo rate –Through RRR, the RBI mops up liquidity from the banking system. The Repo rate was cut from 3.50% to 3.25%.

Easing of Monetary policy since Nov 1996 : ( Contd ) 3. 4.Flow of credit to Agriculture – The flow of credit to agriculture has increased from 34,013 (9.2% of overall credit) in 2008 to 52,742 (13% in overall credit) in 2009 – (Rs. in crore). 5. 6.Reduction in Cash Reserve Ratio – The CRR which was at 15% until 1995 gradually reduced to 5% in 2005. The CRR remained unchanged in the current monetary policy. 7. 8.Lowering Bank rate – The Bank rate was gradually reduced from 12% in 1997 to 6% in 2003.

RBI In Recession  CRR cut to 5% Repo rate cut to 5.5% Reverse Repo rate cut to 4% Short-term lending and borrowing

rates

cut Slashed tax rates Injection of Money Opening up new borrowing channels for banks Government hikes its spending 

Review of 2009/10 Monetary Policy

§GDP growth at 7.9% for Q2 2009 which was predicted to be 6.3 § §WPI-currently at 4.78%. Food Inflation touched 19% because of easy monetary policies & decreasing agricultural production §Bank Rate has been retained unchanged at 6.0 per cent § §Repo Rate has been retained unchanged at 4.75 per cent § §Reverse Repo Rate has been retained unchanged at 3.25 per cent § §CRR- 5 per cent & SLR to 25 per cent of their NDTL § §Planning to tighten liquidity scenario from January

IS CURVE

LM CURVE

IS/LM CURVE

Shifts in Curve ØExpansionary Fiscal Policy - shifts IS right: will tend to increase Y and also increase the interest rate (r) Ø ØContractionary Fiscal Policy - shifts IS left: will tend to reduce both Y and r Ø ØExpansionary Monetary Policy - shifts LM right - reduces r and increases Y ØContractionary Monetary Policy - shifts LM left increases r and reduces Y

Shifts in Curve

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Thank You……. 