Presentation on Monetary&Fiscal Policy of India

1. MONETARY AND FISCAL POLICY OF
INDIA

2. AGENDA
 Introduction
 Monetary Policy
 Role & Objectives
 Instruments
 Inflation
 Fiscal Policy
 Role & Objectives
 Budget -> Revenue and Expenditure
 Taxation -> Structure
 Fiscal Deficit
 Reviews
 Conclusion

3. INTRODUCTION

4. MONETARY POLICY

5. MONETARY POLICY –MEANING….
Reserve Bank of India states that,
 Monetary policy refers to the use of instruments under the
control of the central bank to regulate the availability, cost and
use of money and credit.

6. OBJECTIVES
 Maintaining price stability
 Ensuring adequate flow of credit to the productive Sectors
of the economy to support economic growth
 Rapid economic growth
 Balance of payment equilibrium
 Full employment
 Equal income distribution

7. METHODS
 The RBI aims to achieve its objectives of economic growth and control
of inflation through various methods.
These methods can be grouped as:
 General/ quantitative methods
 Selective/ qualitative methods

8. GENERAL/ QUANTITATIVE METHODS
 These methods maintain and control the total quantity or volume of
credit or money supply in the economy.
 Open Market Operations
 Open market operations indicate the buying/ selling of govt. securities in the open market
to balance the money supply in the economy
 Deployment of Credit
 The RBI has taken various measures to deploy credit in different sector of the economy.
The certain %age of the bank credit has been fixed for various sectors like agriculture,
export etc.

9. DIRECT INSTRUMENTS
Cash reserve ratio (CRR)
The money supply in the economy is influenced by CRR.
 It is the ratio of a bank’s time and demand liabilities to be kept in reserve with the RBI.
The RBI is authorized to vary the CRR between 3% and 15%.
Statutory liquidity ratio (SLR):
Under SLR, banks have to invest a certain percentage of its time and demand liabilities in govt.
approved securities.
 The reduction in SLR enhances the liquidity of commercial banks.

10. INDIRECT INSTRUMENTS
Liquidity Adjustment Facility (LAF):
Consists of daily infusion or absorption of liquidity on a repurchase basis,
through repo (liquidity injection) and reverse repo (liquidity absorption) auction
operations, using government securities as collateral.
1. Repo Rate:
Repo rate is the rate at which the RBI lends shot-term money to the banks
against securities. When the repo rate increases borrowing from RBI
becomes more expensive.
• Reverse Repo Rate:
The rate at which RBI borrows from commercial banks.

11.  Marginal Standing Facility (MSF):
 Instituted under which scheduled commercial banks can borrow over night at their discretion up to one per
cent of their respective NDTL at 100 basis points above the repo rate to provide a safety valve against
unanticipated liquidity shocks
 Bank rate:
 Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial
banks.
 Bank Rate is a tool, which central bank uses for short-term purposes.
 Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit
rates as well as Base Rate / Benchmark Prime Lending Rate.
 Market Stabilization Scheme (MSS):
 Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated
government securities and treasury bills.
 The mobilized cash is held in a separate government account with the Reserve Bank.

13. SELECTIVE/ QUALITATIVE MEASURES
 The RBI directs commercial banks to meet their social obligations through selective/ qualitative
measures.
 These measures control the distribution and direction of credit to various sectors of the
economy.
 CEILING ON CREDIT
 MARGIN REQUIREMENTS
 DISCRIMINATORY RATES OF INTEREST

14. FACTORS AFFECTING MONETARY POLICY
 There exist a non-monetized sector
 Excess of non-banking financial institutions (NBFI)
 Existence of unorganized financial market
 Money not appearing in an economy
 Time lag affects success of monetary policy
 Monetary policy and fiscal policy lacks coordination

15. INFLATION
 Inflation is broadly understood as the general rise in the prices of
goods and services year on year, inflation is a more complex
phenomena associated with the money supply and currency values.

16. PROBLEMS CAUSED BY INFLATION
 High and persistent inflation imposes significant socio-economic costs.
 High inflation distorts economic incentives by diverting resources away from
productive investment to speculative activities.
 Inflation reduces households saving as they try to maintain the real value of
their consumption.
 If domestic inflation remains persistently higher than those of the trading
partners, it affects external competitiveness through appreciation of the real
exchange rate.
The Reserve Bank’s current assessment suggests that the threshold level of
inflation for India is in the range of 4–6 per cent.

17. HOW DOES MONETARY POLICY AFFECT INFLATION AND OTHER
PROBLEMS?
raises
decreases

18. FISCAL POLICY

19. MEANING
 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 )

20. OBJECTIVES OF FISCAL POLICY
• Increase in capital formation.
• Degree of Growth.
• To achieve desirable price level.
• To achieve desirable consumption level.
• To achieve desirable employment level.
• To achieve desirable income distribution.

21. FISCAL POLICY THERE ARE THREE POSSIBLE POSITIONS
 A Neutral position applies when the budget outcome has neutral
effect on the level of economic activity where the govt. spending is
fully funded by the revenue collected from the tax.
 An Expansionary position is when there is a higher budget deficit
where the govt. spending is higher than the revenue collected from
the tax.
 An Contractionary position is when there is a lower budget deficit
where the govt. spending is lower than the revenue collected from the
tax.

22. THE TWO MAIN INSTRUMENTS OF FISCAL POLICY
 Revenue Budget
 Expenditure Budget

23. REVENUE BUDGET
 The taxing Powers of the Central Government encompass taxes on
income,Excise on Goods produced (other than Alcohol), Custom
duties and Inter-state sale of Goods
 The State Governments are vested with the power to tax Land and
Buildings, Sale of Goods (other then Inter-state) and Excise on
Alcohol.

24. Indirect Tax
 central excise (a tax on
manufactured goods)
 VAT @ 12.5%
 service tax @ 12%
 customs duty
 Educational cess @ 3%
Direct Tax
Individual Income Tax &
Corporate Tax.
Wealth Tax @ 1%
Tax deducted at source

25. EXPENDITURE BUDGET
 The central government is responsible for issues that usually concern the country
as a whole like national defence, foreign policy, railways, national highways,
shipping, airways, post and telegraphs, foreign trade and banking.
 The state governments are responsible for other items including, law and order,
agriculture, fisheries, water supply and irrigation, and public health.
 Some items for which responsibility vests in both the Centre and the states include
forests, economic and social planning, education, trade unions and industrial
disputes, price control and electricity.

26. THE EXPENDITURE BUDGET INCLUDES FOUR MAIN REVENUE
EXPENDITURES
 Total expenditure is Rs.16,65,297 crores (11.5% increase)

27. FISCAL DEFICIT
 Fiscal Deficit = Total Expenditure (that is Revenue Expenditure +
Capital Expenditure) – (Revenue Receipts + Recoveries of Loans
+ Other Capital Receipts)
 Currently the deficit is 5.1 % of GDP

28. MAJOR CHANGES IN BUDGET(2013-14) TO CURB DEFICIT…
 One year surcharge of 10 % on the Superrich.
 Increased Duties on Imported or domestic luxury vehicles such as
SUV’s, Mobiles (>Rs.2000), set top boxes, A/c restaurants and
Cigarettes.( bring in Rs.18,000 crores)
 Disinvestment Proceedings to be around Rs.55,000 Crore for this
fiscal.
 No additional subsidy for fuel, food and fertilizer prices.
 Buyers of immovable property other than agriculture land will have to
pay a tax of 1% of the sale where the value exceeds Rs.50 lakh.

29. CONCLUSION
 Fiscal deficit
 Current account deficit
 Currency depreciation
 Lower growth
 Supply side gap in Food (inflation)
 Only 42800 earn more than 1 crore and 1.9 lakh people earn more
than 10 lakhs!!!!!!

30. REVIEWS
Subbarao, RBI Governor (2012) explained that, India is unique in the sense
that we are one of the economies in the world that is supply constrained. There is
shortage of infrastructure both in quantum and quality. We need to improve that so that
corporates become more competitive, so that economic production becomes more
competitive. First on infrastructure, second, we need to improve supply of food,
especially of protein foods. Third, is skilled labour. It is one thing to have a huge labour
force but another to have a labour force that is not adequately skilled. The skill
shortage is going to be a big threat.
Bhatt (2012) suggested that the need of today is not just the pumping of
liquidity in to the Indian economy but also in addition the injection of demand. This can
occur only through direct fiscal action by government. In India, larger government
expenditure has to be oriented towards agriculture, rural development, health, human
resources and infrastructure to make inclusive and balanced growth.

31. Thank You
Sai Teja -1113218
Bhargav Santhosh - 1113262